News Archives: March, 2017
The Investment Company Institute released its latest weekly "Money Market Mutual Fund Assets," and its latest monthly "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds" updates yesterday. The first report shows that `money fund assets were flat in the latest week, while the second showed that assets were also flat in February. ICI's other monthly report confirmed that Treasury and Agency holdings fell while Repo and CDs moved higher last month. (See our March 10 News, "March Money Fund Portfolio Holdings Show Continued Credit Recovery.") We review these latest reports, as well as March month-to-date assets, below.
ICI's weekly assets report shows both overall and Prime money fund assets down slightly, but roughly flat. It says, "Total money market fund assets decreased by $110 million to $2.65 trillion for the week ended Wednesday, March 29, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $480 million and prime funds decreased by $150 million. Tax-exempt money market funds decreased by $450 million." Total Government MMF assets, which include Treasury funds too stand at $2.126 trillion (80.1% of all money funds), while Total Prime MMFs stand at $397.8 billion (15.0%). Tax Exempt MMFs total $130.0 billion, or 4.9%.
It explains, "Assets of retail money market funds increased by $360 million to $984.26 billion. Among retail funds, government money market fund assets increased by $330 million to $603.57 billion, prime money market fund assets increased by $390 million to $255.18 billion, and tax-exempt fund assets decreased by $370 million to $125.51 billion." Retail assets account for over a third of total assets, or 37.1%, and Government Retail assets make up 61.3% of all Retail MMFs.
The release continues, "Assets of institutional money market funds decreased by $470 million to $1.67 trillion. Among institutional funds, government money market fund assets increased by $150 million to $1.52 trillion, prime money market fund assets decreased by $540 million to $142.64 billion, and tax-exempt fund assets decreased by $80 million to $4.54 billion." Institutional assets account for 62.9% of all MMF assets, with Government Inst assets making up 91.2% of all Institutional MMFs.
ICI's latest "Trends in Mutual Fund Investing - February 2017" shows a $0.4 billion increase in money market fund assets in February to $2.682 trillion. The increase follows an increase of $46.6 billion in January, $6.5 billion in December and $55.3 billion in November, but a decrease of $12.1 billion in Oct. and $51.1 billion in Sept. In the 12 months through Feb. 28, money fund assets were down $92.1 billion, or -3.3%. (Month-to-date in March through 3/30/17, our Money Fund Intelligence Daily shows total assets down by $20.4 billion. `Govt MMFs are down $25.2 billion, while Prime MMFs are up $3.4 billion.)
The monthly report states, "The combined assets of the nation's mutual funds increased by $338.17 billion, or 2.0 percent, to $16.92 trillion in February, according to the Investment Company Institute’s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $23.69 billion in February, compared with an inflow of $21.57 billion in January.... Money market funds had an inflow of $197 million in February, compared with an outflow of $48.08 billion in January. In February funds offered primarily to institutions had an outflow of $46 million and funds offered primarily to individuals had an inflow of $243 million."
The latest "Trends" shows that Taxable MMFs were flat while Tax-Exempt MMFs decreased slightly in February 2017. Taxable MMFs increased by $0.8 billion In February, after decreasing $46.8 billion in January, and rising $6.3 billion in December and $53.4 billion in Nov. Tax-Exempt MMFs decreased $0.3 billion in February, after adding $0.1 billion in Jan., $0.3 billion in Dec., and $1.9 billion in Nov.
Over the past year through 2/28/17, MMF assets decreased by $92.1 billion, or -3.3%, with a $17.3 billion increase in Taxable funds and a $109.2 billion decrease in Tax-Exempt funds. Money funds now represent 15.9% (down from 16.2% last month) of all mutual fund assets, while bond funds represent 22.1% <b:>`_. The total number of money market funds was down 1 to 419 in February, and down from 479 a year ago. (Taxable money funds have declined from 336 to 319 and Tax-exempt money funds have declined from 143 to 100 over the last year.)
ICI's Portfolio Holdings confirmed another big drop in Treasuries and Agencies in February. Repo increased again, and remained the largest portfolio segment, up by $26.3 billion, or 3.4%, to $791.5 billion or 31.0% of holdings. Repo increased by $249.5 billion over the past 12 months, or 46.0%. Treasury Bills & Securities remained in second place among composition segments, declining $24.0 billion, or -3.2%, to $736.1 billion, or 28.8% of holdings. Treasury holdings rose by $221.7 billion, or 43.1%, over the past year. U.S. Government Agency Securities remained in third place, but fell $20.5 billion, or -2.9%, to $691.9 billion or 27.1% of holdings. Govt Agency holdings rose by $215.7 billion, or 45.3%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they increased $6.4 billion, or 3.7%, to $181.3 billion (7.1% of assets). CDs held by money funds fell by $410.5 billion, or -69.4%, over 12 months. Commercial Paper remained in fifth place but increased $1.6B, or 1.4%, to $113.2 billion (4.4% of assets). CP plummeted by $199.9 billion, or -63.8%, over one year. Notes (including Corporate and Bank) were up by $2.6 billion, or 39.2%, to $9.3 billion (0.4% of assets), and Other holdings inched down to $32.0 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 164.6 thousand to 25.481 million, while the Number of Funds was flat at 319. Over the past 12 months, the number of accounts rose by 2.758 million and the number of funds declined by 17. The Average Maturity of Portfolios was 40 days in Feb., down 2 days from Jan. Over the past 12 months, WAMs of Taxable money funds have lengthened by 1 day.
Crane Data hosted its first Bond Fund Symposium conference in Boston last week, and the turnout and enthusiasm of attendees confirmed what many had thought, that the ultra-, ultra short or "conservative" ultra-short bond fund sector is one of the hottest and fastest-growing in the mutual fund industry. Bond Fund Symposium brought together 150 bond fund managers, marketers, and professionals with fixed-income issuers, investors, regulators and service providers for a day and a half of intense discussion on all things bond fund-related. We briefly review the some of the sessions below, but watch for more coverage in the upcoming issues of our Bond Fund Intelligence and Money Fund Intelligence newsletters. Thanks to our excellent speakers, our generous sponsors, and all who attended our event last week! Mark your calendars too for next year's event, which will be March 22-23, 2018, in Newport Beach, Calif. (Note: The session recordings, Powerpoints and full conference binder are available to attendees and Crane Data subscribers here or at the bottom of our "Content" page.)
Bond Fund Symposium's Keynote, "The Time Is Now for Short‐Term Strategies," was given by Jerome Schneider, Managing Director and Head of Short-Term at PIMCO. Schneider gave an excellent overview of the short-term space and PIMCO's dramatic growth in this area. (Assets in their ultra-shorts have increased from under $4 billion before the crisis to over $18 billion currently.) He also urged attendees to redouble efforts to educate investors about the benefits of ultra-short bond funds. (Unfortunately, our recorder wasn't on for this session, so we don't have a transcription.)
The next session, "Segmenting the Ultra-Short Bond Market," featured Crane Data's Peter Crane, with Fidelity Investments' Michael Morin and J.P. Morgan A.M.'s Dave Martucci. Crane commented, "The short term bond fund space is pretty large overall, you're looking at about $400 billion roughly." But ultra-short bond funds are just a quarter of this and "conservative" ultra-short a quarter of this. He added, "There are [funds] near money funds, and there are short-term funds that are doing things that are alien to money market mutual funds.... One of our decisions early on was to launch a Conservative Ultra-Short category, to in effect slice the ultra-short in two, to make a segment that is more liquid, more suited to institutional investors."
Morin explained, "The one thing you won't hear from me is 'enhanced cash.' I have a long-memory [and] remember ... having people walk through the door 'I've got the greatest new product for you.... It's just like a money market fund but at a higher yield'.... We wanted to clearly delineate the conservative ultra-short bond space from the money market space. And that really went into the name of our fund, which we ended up with the Conservative Income Bond Fund. We intentionally left 'bond fund' in there to really try to eliminate any confusion that this was a money market fund in disguise."
He continued, "As Jerome started off the conference, this is all about investor education and making sure that they understand that these funds are not money market funds. The risk profile of the asset class is very different than money market funds, and it's imperative that we, as industry practitioners, make sure that clients know what they're buying. I think the worst thing that could happen for us in this emerging field of conservative ultra-short bond funds is clients really don't understanding ... them."
The conference also featured the sessions: "Bond Strategists: Outlook for Rates," with Bank of America Merrill Lynch's Mark Cabana and RBC Capital Markets' Michael Cloherty; "Ratings & Risks in Bond Funds," with Fitch Ratings' Greg Fayvilevich and Standard & Poor's Ratings Peter Rizzo; and, "Senior Portfolio Manager Perspectives," with Putnam Investments' Joanne Driscoll, Goldman Sachs AM's John Olivo <b:>`_, and Northern Trust Asset Mgmt's Morten Olsen. Olivo explained, "We also have [a fund] that maybe is an offshoot from a money market fund, where the duration is 6 months or shorter, and [it's] a little bit further out the curve. So you're really benefiting from the dislocation that we've seen over the last 9 months."
Olsen added, "Ultra-short really falls under what we call liquidity management capabilities, short duration. It's anything that goes from overnight and out to 5 years on the curve.... I'd say roughly $20 billion falls under ultra-short.... There's been a lot of talk about segmenting ultra-short and we certainly do that within our team as well. We have an ETF which is roughly 6 months duration. We have our standard ultra-short strategy, which is similar to that. It's a 6 month duration target. Sometimes it'll be a little longer, or sometimes it'll be a little shorter."
Driscoll told the audience about the Putnam Short Duration Income Fund, "It really goes back to the financial crisis, and [then] the regulatory environment in 2010 ... we went to the trustees and said 'Listen, we want to create a product that sits just outside the traditional 2a-7 funds'.... Clearly, it's not a money market fund, but it's able to exploit those changes. So we launched the fund in 2001, it has about $6.5 billion.... How we position this fund is a maximum one year duration, all investment grade, all dollar denominated."
The first day also featured: "Major Issues in Fixed-Income Investing," moderated by Alex Roever of J.P. Morgan Securities and featuring: Tony Wong of Invesco, Jeff Weaver of Wells Fargo Funds, and Bob Ostrowski of Federated Investors; ETF Trends & Investors; USBF Portal Usage," with James Meyers of Invesco PowerShares and Alex Swartwood of Institutional Cash Distributors; and, "Corporate & Intermediate-Term Bond Funds," with Justin Bullion of Payden & Rygel, Tom Connelley of State Street Global Advisors, and Sean Rhoderick of PNC Capital Advisors.
Day Two's agenda included: "State of the Bond Fund Marketplace" with Peter Crane and ICI's Sean Collins; "Regulatory Update: Liquidity & More" with Dechert's Stephen Cohen, and Sullivan & Worcester's John Hunt; a "Government Bond Fund Discussion" with Federated's Sue Hill; "Municipal Bond Fund Issues" with Neuberger Berman's Kristian Lind and Fidelity Investments' Doug McGinley; and, finally, "Bond Fund Data, Statistics & Software with Peter Crane and James Morris of Investortools.
Crane Data recently celebrated the second anniversary of its Bond Fund Intelligence newsletter and BFI XLS bond fund information service and benchmarks, and continues to expand its fixed income fund offerings with the launch of Bond Fund Symposium. As we mentioned, our next Crane's Bond Fund Symposium is tentatively scheduled for March 22-23, 2018, in Newport Beach, California. We'll be preparing the agenda later this summer, but we'd love to hear more feedback for the second iteration of this event. We'd also love to get more sponsor support and will be reviewing requests for speaking slots in the coming months. (Contact Pete for more information.)
Finally, Crane Data is also making preparations for our "big show," `Money Fund Symposium, which will be held June 21-23, 2017, at the Atlanta Hyatt Regency. The agenda is now set and registrations are being taken, and we encourage attendees to make hotel reservations soon. We're also now taking registrations for our next European Money Fund Symposium, which will be Sept. 25-26, 2017, in Paris, France. Finally, watch for more details on our next Money Fund University, which will be in Boston, Jan. 19-20, 2018, in coming months. We hope to see you at one of our events in 2017 or 2018!
We learned from Financial Advisor magazine about yesterday's "Testimony before the United States Senate Committee on Banking, Housing, and Urban Affairs" from Thomas Deas, Jr., Chairman of the National Association of Corporate Treasurers on "Fostering Economic Growth: The Role of Financial Companies." Deas proposes "to focus on a few areas in which certain regulatory changes could benefit Main Street companies so that we can grow our businesses and increase employment opportunities for our American workers," and he includes a number of comments on money market funds in his testimony.
The NACT Chairman said, "Chairman Crapo, Ranking Member Brown, and the other members of this Committee: Thank you for the opportunity to testify at this important hearing focusing on our country's future economic growth. I am Thomas C. Deas, Jr., recently retired vice president and treasurer of FMC Corporation and current chairman of the National Association of Corporate Treasurers ("NACT"), an organization of treasury professionals from several hundred of the largest public and private companies in the country. At the outset, I would like to thank you, Chairman Crapo, for your efforts to make sure that end‐users are able to engage in prudent risk‐management activities without facing costs that could make such activities prohibitively expensive."
The statement contained a section entitled, "End‐Users and Money Market Mutual Funds," which explained, "There is no question that liquidity is the lifeblood of any business. Without having ample liquidity, production comes to halt, inventories run low, and bills are not paid on time. The cyclical nature of many businesses places significant importance on the availability of committed financing so that they can operate efficiently and without disruption. To illustrate the interconnectivities between end‐users and the financial markets, it is useful to consider their use of money market mutual funds ("MMMFs")."
It continues, "This has been a market of more than US$2.5 trillion not only selling short‐term investments to handle treasurers' temporary excess cash, but on the other side, buying the commercial paper corporate treasurers issue to finance the day‐to‐day funding needs of their companies. However, in September 2008 the Primary Fund of the Reserve Fund group of mutual funds "broke the buck" when it reported a net asset value per share that rounded to less than a dollar. In the period since the financial crisis, regulators have sought new rules for MMMFs to strengthen the market during times of financial stress. MMMFs had always operated with fixed net asset values ("NAV") with a price per share greater than share."
Deas writes, "Congress felt it unnecessary to include additional reforms for MMMFs in the Dodd‐Frank Act as the SEC had already enhanced regulations under its Rule 2a‐7 changes in 2010. However, additional changes went into effect on October 14, 2016 that impose liquidity fees and redemption gates to spring up during periods of market stress. A requirement for a prime fund's NAV to float and be reported to the nearest hundredth of a cent significantly complicates investments in prime funds for corporate treasurers. The floating NAV requirement does not apply to MMMFs investing in government securities, however."
He tells the Senate Banking Committee, "The practical implications of the new rules are daunting for corporate treasurers. Corporate treasury and financial reporting systems up until now have treated fixed NAV MMMFs as cash equivalents. Now MMMF shares in non‐government funds will have a floating NAV per share that must be tracked essentially in real time. For federal and state income tax purposes, a floating NAV requires treasurers to keep track of gains and losses when they inevitably buy MMMF shares at one price and sell them at another in the routine redemption of their investment."
The NACT Chair continues, "Since treasury systems must compete with other departments for internal IT resources, the question of what alternatives are available must be answered. Corporate treasurers can abandon the prime MMMF market and instead invest in government MMMFs that can retain the dollar per share fixed NAV. However, prime funds are important to treasurers not only as a flexible alternative for investments of temporary excess cash balances, but also as providers of short‐term funding by buying corporate CP notes. As the graph below shows, in the year running up to the October 14, 2016 implementation of the new regulations, fund purchases of corporate CP declined significantly."
He adds, "Concerns about investors fleeing prime MMMFs have indeed proven true, declining by US$1 trillion to US$376 billion since the rule became final (see chart below). The cure proved worse than the disease for many fund managers as they closed almost 200 institutional prime funds (see chart below)."
Finally, he comments, "The cumulative effect of the regulatory changes on MMMFs caused US$1 trillion to leave prime funds with much of that moving to government funds unaffected by all the same rules. Corporate treasury investors in these funds were unable to justify or implement quickly enough changes to their treasury and financial reporting systems required by the new rules. End‐user companies were adversely affected not only through fewer choices for the investment of their cash, but for many, an uptick in CP borrowing costs as an important investor base went away."
FA's article, entitled, "Institutional Money Market Funds Drying Up, Treasurers Group Says," says, "Institutional prime money market funds are drying up since SEC rules took effect in October, according to a corporate treasurers trade group. About $1 trillion has fled the funds, leaving $376 billion, since the funds were required to have floating share prices (instead of the traditional $1), liquidity fees and redemption gates, NACT Chair Thomas Deas Jr., chair of the National Association of Corporate Treasurers, says in prepared testimony for the Senate Banking Committee."
It adds, "In the run-up to the SEC rules, the number of institutional prime funds shrank in four years by about one-third, to around 400. Retail investors cannot buy these funds. However, such investors are indirectly exposed to fluctuations in the prices of the institutional funds by their holdings in traditional mutual funds and their pension funds, which can invest in these vehicles. Deas indicated many corporate treasures may be fleeing institutional prime money market mutual funds and going into government funds because they may not be able to get the considerable help they would need from their IT departments to keep track of gains and losses when they buy institutional shares at one price and sell them at another in routine redemptions."
The Investment Company Institute released its "Worldwide Regulated Open-End Fund Assets and Flows Fourth Quarter 2016" yesterday. The latest data collection on mutual funds in other countries (as well as the U.S.) shows that money fund assets globally fell by $22.1 billion, or -0.4% in Q4'16, led by decreases in China, France and Korea. MMF assets worldwide have decreased by $42.6 billion, or -0.8%, the past 12 months. The U.S., Ireland and Brazil showed the biggest asset increases in Q4'16, while Luxembourg, France, Brazil, and India showed the largest increases in 2016. China, The U.S., Japan and Belgium posted the largest declines over the past year. We review the latest `Worldwide MMF totals below.
ICI's release says, "Worldwide regulated open-end fund assets decreased 1.2 percent to $40.36 trillion at the end of the fourth quarter of 2016, excluding funds of funds.... The Investment Company Institute compiles worldwide open-end fund statistics on behalf of the International Investment Funds Association, the organization of national fund associations.... Bond fund assets decreased by 2.9 percent to $8.94 trillion in the fourth quarter. Balanced/mixed fund assets decreased by 2.4 percent to $5.32 trillion in the fourth quarter, while money market fund assets decreased by 0.3 percent globally to $5.04 trillion."
It explains, "At the end of the fourth quarter of 2016, 42 percent of worldwide regulated open-end fund assets were held in equity funds. The asset share of bond funds was 22 percent and the asset share of balanced/mixed funds was 13 percent. Money market fund assets represented 12 percent of the worldwide total. By region, 52 percent of worldwide assets were in the Americas in the fourth quarter of 2016, 35 percent were in Europe, and 13 percent were in Africa and the Asia-Pacific regions."
The release adds, "Globally, bond funds posted an inflow of $115 billion in the fourth quarter of 2016, after recording an inflow of $281 billion in the third quarter. Inflows from balanced/mixed funds worldwide totaled $36 billion in the fourth quarter of 2016, compared with $47 billion of inflows in the third quarter of 2016. Money market funds worldwide experienced an inflow of $75 billion in the fourth quarter of 2016 after registering an inflow of $47 billion in the third quarter of 2016."
According to Crane Data's analysis of ICI's "Worldwide" fund data, the U.S. maintained its position as the largest money fund market in Q4'16 with $2.728 trillion (or 54.2% of all global MMF assets). U.S. MMF assets increased by $56.1 billion in Q4'16 and decreased by $26.6B in the 12 months through Dec. 31, 2016. China remained in second place among countries overall, though assets fell sharply in the latest quarter and year. China saw assets decline $47.6 billion (down 7.2%) in Q4 to $616.9 billion (12.3% of worldwide assets). Over the last 12 months through Dec. 31, 2016, Chinese MMF assets have dropped $67.6 billion, or 9.9%.
Ireland remained third among these country rankings, ending Q4 with $504.0 billion (10.0% of worldwide assets). Dublin-based MMFs were up $8.7B for the quarter, or 1.8%, and down $4.8B, or -0.9%, over the last 12 months. France remained in fourth place with $364.0 billion (7.2% of worldwide assets). Assets here decreased $12.9 billion, or 3.4%, in Q4, and were up $25.5 billion, or 7.5%, over one year. Luxembourg was in fifth place with $352.6B, or 7.0% of the total, down $2.0 billion in Q4 (-0.6%) and up $30.3B (9.4%) over 12 months.
Korea, the 6th ranked country, saw MMF assets decline $11.7 billion, or -11.9%, to $87.0 billion (1.7% of total) in Q4 and rise $7.0 billion (8.7%) for the year. Brazil remained in 7th place, increasing $6.9 billion, or 10.5%, to $72.1 billion (1.4% of total assets) in Q4. It increased $20.8 billion (40.5%) over the previous 12 months. (ICI's data no longer includes money fund figures for Australia, but they would rank as the sixth largest market at $322 billion, their level of two years ago, if they were still included. Australia's MMF assets were shifted into the "Other" category several quarters ago.)
ICI's statistics show Mexico in 8th place with $47.4B, or 0.9% of total, down $4.5B (-8.7%) in Q4 and down $6.3B (-11.7%) for the year. India was in 9th place, decreasing $889 million, or -1.9%, to $45.5 billion (0.9% of total assets) in Q4 and increasing $10.2 billion (29.1%) over the previous 12 months. Taiwan was in 10th place with $26.7 billion, or 0.5% of worldwide assets.
South Africa ($21.6B, up $203M and up $4.8B over the quarter and year, respectively), Chile ($19.7B, up $151M and up $2.2B),`Switzerland <b:>`_ ($18.3B, down $1.6B and down $923M), Canada ($18.2B, down $252M and down $42M) Sweden ($18.1B, down $1.0B and down $3.0B), and ranked 11th through 15th, respectively. United Kingdom, Spain, Norway, Poland and Germany round out the 20 largest countries with money market mutual funds. Chile moved ahead of Switzerland in the latest rankings.
Note that Ireland and Luxembourg's totals are primarily "offshore" money funds marketed to global multinationals, while most of the other countries in the survey have primarily domestic money fund offerings. Contact us if you'd like our latest "Largest Money Market Funds Markets Worldwide" spreadsheet, based on ICI's data, or if you'd like to see our MFI International product.
J.P. Morgan Asset Management published a series of briefs urging investors to reconsider Prime money market funds. The lead piece, entitled, "Capitalizing on the prime opportunity," and subtitled, "A fresh look at the case for prime money market funds (MMFs)," explains, "SEC amendments to Rule 2a-7 have spurred growing demand for government MMFs, resulting in a move away from prime MMFs. However, growing confidence in the operational stability of prime funds -- along with increasingly attractive spreads -- is gearing up to entice investors back again." We review the three JPMAM papers below, and also quote from a new BlackRock brief entitled, "Time for Prime." (Note: Thanks again to attendees, speakers and sponsors of our first Bond Fund Symposium, which took place last week in Boston. The binder, Powerpoints and recordings are now available to attendees and Crane Data subscribers at the bottom of our "Content" center here.)
JPMAM's lead explains, "For institutional clients, the existence of fees and gates theoretically jeopardizes their ability to access their cash at all times -- reducing the attraction, for some, of investing in prime MMFs. Meanwhile, for retail investors, fees and gates appear to have raised substantial barriers to access."
They tell us, "Broker dealers and pension plan sponsors have been unwilling to build the infrastructure that is now needed to allow retail clients to invest in prime MMFs, forcing these intermediaries to move their clients to government MMFs, which carry no requirement to adopt gate and fee provisions, nor transact at FNAV. As a result, the prime MMF market is now significantly smaller than its government counterpart, which was boosted by substantial inflows in the second half of 2016."
The piece asks, "So why revisit Prime right now?" It answers, "Robust demand for government MMFs is forcing yields lower, while reduced demand for prime MMFs is pushing yields higher, creating historically attractive relative spreads. At the same time, institutional investors are becoming increasingly comfortable with the operational stability of prime MMFs. As a result, we anticipate that the investment tide will turn, with assets being drawn back into prime."
They show a chart with a yield spread of 44 basis points between JPMorgan Prime MMF/Capital class and JPMorgan US Govt MMF/Capital, and they show asset growth of 25% in JPM Prime MMF since Oct. 14, 2016. (Crane Data shows Prime Inst MMFs yielding 0.69% on average, with a number of funds now yielding over 1.00%, vs. average yields of 0.41% for Treasury Inst MMFs and 0.43% for Govt Inst MMFs. Thus spreads overall are 28 or 26 basis points, and they're even higher on the pure "Inst" share classes of most funds.)
JPMAM's second paper, entitled, "Floating NAV (FNAV) prime funds: still a compelling option for liquidity investors," discusses, "Replicating the operational benefits of stable NAV prime funds." It says, "On October 14, 2016, the two most significant reforms introduced by the Securities and Exchange Commission (SEC) for institutional prime money market funds (MMFs) came into effect: the option to introduce gates and fees, and the obligation to transact at FNAV."
On "What Has Changed," J.P. Morgan Asset Management comments, "Prime MMF boards can now opt to impose liquidity fees and redemption gates, but only if they believe it is in the best interests of their funds -- and only if weekly liquid assets (WLA) fall below 30%. Additionally, institutional prime and municipal MMFs must transact at FNAV. For liquidity investors -- and retail clients, in particular -- these new requirements have acted as a barrier to investment, driving assets out of prime and into government funds."
But they explain, "Very little has actually changed. From an operational point of view, prime MMFs remain as easy to use as their government counterparts: they still offer the same easy access, flexible trading and multiple T+0 settlements per day. Crucially, NAV volatility remains reassuringly benign in the wake of the move to FNAV. It's also worth remembering that neither the boards of prime nor government MMFs are under any obligation to impose fees and gates on their funds." They show the "Multiple NAV Strikes and Settlement Cycles per Day" in a graphic, explaining that JPMorgan Prime has an 8am, noon, and 3pm NAV, so a trade placed at 9am would transact at noon, and if a redemption would "typically receive cash prior to 2pm".
The third new update, "Fees and gates: a decision - not an obligation," states, "Under the new Securities and Exchange Commission (SEC) rules, effective on October 14, 2016, money market fund (MMF) boards can contemplate whether to implement a liquidity fee or redemption gate in certain circumstances.... Boards have two key powers under the new rules. If a fund's weekly liquid assets (WLA) drop below 30%, a board has the option to impose a liquidity fee of up to 2% on redemptions until WLA rise above 30%. It can also set a gate on redemptions for any 10 days out of a 90-day period. If a fund's WLA drop below 10%, a 1% fee is required to be imposed, unless the Board determines that it's not in the best interest of the fund to do so."
They clarify, "It's important to remember, however, that a breach of the 30% threshold doesn't automatically lead to a fee or gate -- these are only employed if the board believes them to be in the best interests of the fund and its investors. In the event that WLA drop below 10%, however, the board must assess the liquidity profile of the fund, but can still choose not to take action, if in the best interests of the fund and its investors."
Finally, the piece also says, "Portfolio managers do everything within their power to actively manage weekly liquidity well above the 30% threshold. This is first achieved by carrying a robust liquidity buffer above the required threshold. If a fund approaches a liquidity threshold, a number of tools can be utilized to increase its liquidity buffer, including limiting term purchases and/or selling portfolio securities. Additionally, we employ a rigorous governance framework to manage client concentration risk. And lastly, our dedicated distribution model fortifies the client relationship, supporting an active dialogue and significantly curtailing unknown cash flow activity."
BlackRock's "Time for Prime?" update asks, "The paradigm has shifted. Are prime money market funds right for you? <b:>`_. It explains, "There is no longer a one-size-fits-all solution in the money market space. In the new world of cash investing, should prime money market funds (MMFs) have a place in your strategy? In addition to the transparency information available elsewhere on this site, the information below may help you better understand how an allocation to prime MMFs could be additive to your portfolio. We are here to help. Contact us to discuss your needs."
They write, "Assets are steadily returning to the category. TempFund continues to gather assets. Since October 11, 2016 - the implementation date of the floating net asset value (FNAV) per share - portfolio assets have increased 38%, have been in net-positive territory (compared to October 11th assets) every day of 2017, and are up 54% year-to-date." (The piece shows a chart of TempFund assets, as well as spreads going back to 10/16 and daily income on a theoretical $100 million investment.)
BlackRock also says, "Prime MMF spreads are compelling. Since the implementation of the FNAV, TempFund (Institutional share class) has yielded 0.34% more than FedFund (Institutional share class) on average. With a current yield of 0.90%, the current spread is 0.38%. Scale is important. Only four institutional prime MMFs have assets approaching or above $10 billion. This threshold is important for investors concerned with concentration. A large and diversified fund can offer a myriad of potential benefits from risk management to yield enhancement. We believe BlackRock's $403.6 billion cash management platform can help clients efficiently manage their liquidity needs."
This month, Bond Fund Intelligence speaks with Morten Olsen, Director of Ultra-Short Fixed Income at Northern Trust Asset Management. Olsen oversees Northern's ultra-short bond fund lineup, including the $2.1 billion Northern Ultra Short Fixed-Income (NUSFX) and the $3.5 billion Northern Tax-Advantaged Ultra-Short Fixed-Income (NTAUX). We discuss fund strategies, rates, risks and the future of ultra-short bond funds below. Olsen expects a very busy 2017 for the sector. (Note: This "profile" is reprinted from the March issue of BFI. Contact us if you'd like to see the full issue.) Also, thank you to those who attended our inaugural Bond Fund Symposium in Boston, which attracted over 150 participants!
BFI: How long have you been running ultra-shorts? Olsen: Northern Trust has been running ultra-short strategies since the late 1980's. Ultra-short is part of our broader liquidity management capabilities at Northern Trust Asset Management, which currently total approximately $225 billion in AUM. Our liquidity management capabilities include government and prime money market funds, as well as ultra-short strategies. Common across all these strategies is our conservative investment approach, which focuses on credit research and risk management. I have 13 years of experience in the fixed income industry. I joined Northern Trust back in 2009 in the London office, and in May of 2016 I took over as director of ultra-short based here in Chicago.
BFI: Tell us about the funds. Olsen: We have two mutual funds. They were started back in 2009 and have a combined AUM of $5.5 billion. The two funds differ in their strategies, and therefore attract a different client base. The taxable mutual fund focuses on corporate bonds and on Treasury securities, and the tax-advantaged fund focuses mainly on municipal securities but will also add corporate bonds.... The tax-advantaged strategies will only add corporate bonds when the after-tax yields of these are favorable compared to a tax-free municipal bond.
Olsen: Ultra-short falls under our cash segmentation strategy, which is a way for our clients to bucket their cash. The three buckets are: operational cash, which is for day-to-day needs -- a client should typically be investing into a government fund for this portion; reserve cash, which is for intermediate needs -- this portion should be invested into a prime money market fund; then the last bucket, strategic cash. That's where ultra-short really becomes interesting. Strategic cash has a horizon of up to 6 to 18 months, and using an ultra-short strategy is a way for our clients to earn a bit higher yield while only taking limited additional risk.
BFI: How has the reception been of late? Olsen: Over the last couple of years, ultra-short has become extremely popular, not only at Northern Trust. Money market fund reform certainly played a big part in the growth we saw last year, and it still does. But the market that we've been in the last 7-8 years, with close to zero interest rates, meant that investors were looking for additional yield. Ultra-short played nicely in the search for higher yields and our conservative approach resonated well with clients. They know that we never compromise our risk management practices when we search for higher yields. When I look at the asset growth for our ultra-short business, we have seen significant growth last 5 years. We now manage close to $20 billion across our whole ultra-short business.
BFI: What's your biggest challenge? Olsen: Fixed income investors face some significant challenges at the moment, but it's important to remember that challenges often open the door for new opportunities. A good example of that is the potential for a more active Fed in 2017; that's certainly a concern for most fixed income managers at the moment. No client likes to see negative performance, which could be the consequence of higher rates in the short term. That is, I would say for us, the biggest challenge for us at the moment.
The way we've been trying to deal with this is to position our portfolios a bit shorter in duration. We've also made a big effort to get in front of our clients and talk about the consequences of higher rates. The flip side of higher rates and the short-term negative effect on performance is the fact that, as an investor and as a portfolio manager, you start investing into higher yields. The floating rate notes that we have in our portfolio will start resetting at higher rates. With higher rates we often see a steeper yield curve as well, something that's welcomed by fixed income portfolio managers.
BFI: What kinds of strategies can and can't you use? Olsen: Compared to a money market fund, we do take additional duration risk. A typical ultra-short fund will target duration anywhere between 6 and 18 months. The other big difference between an ultra-short fund and a money market fund is the fact that we will utilize the full investment grade spectrum. Then looking at the other side and comparing us to how long bond funds tend to invest, ultra-short funds certainly will have a much larger allocation to floating rate notes. We tend to set a final legal maturity on our bonds. An ultra-short fund typically won't invest further out than 5 years for a floating-rate note and 3 years for a fixed-rate note.
A conservative approach is certainly one of our main messages to our clients. That's why we've decided not to add any high yield bonds into our portfolios. We don't add any derivatives. We don't add any cross-currency securities into our portfolios. We want to be straightforward in our approach to investing. One other point to highlight when we talk about our conservative approach is our diversification and our issuer concentration limits. We have plenty of clients that are comfortable with a 5% allocation to a credit. But we don't think that is appropriate. So we've set our own internal credit risk management limits much lower.
BFI: What sectors does the fund buy? Olsen: It's always been one of the worries about money market funds -- the high concentration to financial securities. One of the advantages of being in an ultra-short fund is that you have better diversification. We set our overall industry limits at 25%, so we will not have more than 25% exposure to financial securities within our mutual funds. So that leaves us with 75% of something else. On average, we probably have 15% of allocation to Treasuries. The rest of the portfolio is diversified between corporate bonds and triple-A rated asset-backed securities. Then in our tax-advantaged funds, we obviously have a fairly high allocation to municipal securities. But here again we will diversify across different sectors. We have some clients who specifically ask us to only buy U.S. bonds, and we can still produce a fully diversified portfolio.
BFI: Do you do separate accounts? Olsen: We do have a pretty large separately managed account business within ultra-short. If you look at our overall AUM at roughly $20 billion, the two mutual funds are roughly $5.5 billion [vs.] nearly $15 billion in separately managed accounts. These accounts tend to be preferred by our larger investors. They really appreciate our flexibility in creating guidelines and portfolios that match their risk appetite. That's why, prior to opening any new account, we will spend a considerable amount of time with our clients. We sit down and talk to them to understand their constraints, their liquidity needs, and really understand their risk appetite. That's really the number one advantage of the separately managed accounts -- the flexibility you can offer your clients.
Our FlexShares Ready Access Variable Income (RAVI) exchange-traded fund launched in 2012 and follows the same guidelines as our taxable mutual fund. The big difference is that we target a shorter duration in the ETF. We mainly do this to limit the price fluctuation. While the mutual funds tend to target duration of up to 1 year, the ETF will be much closer to 6 months. Hence the ETF will have a higher allocation to money market securities than our mutual fund.
BFI: Will rate increases impact you? Olsen: Absolutely. If the Fed is successful in raising rates slowly, ultra-shorts certainly benefit. We like slow increases in rates due to the higher reinvestment rates. We spend a lot of time with our clients to remind them and tell them up-front that ultra-short funds do have risk, although it is limited. It's important to know that an ultra-short fund is not for day-to-day liquidity. There will be fluctuations in the NAV. If your investment horizon is shorter than 12 months, ultra-short is probably not the right product.
BFI: Can you comment on regulations? Olsen: The biggest regulatory change, although it didn't directly impact ultra-short funds, was clearly money market fund reform. It meant two things for our market. We saw investors move out of prime funds into government funds. But it also meant more flows for ultra-short funds. The second effect was mispricing of some money market securities [which had] yields that were much higher than expected. That was certainly something that we took advantage of in our ultra-short funds.
BFI: Tell us about your investors. Olsen: Historically our client base was very much driven by our wealth management business; almost 100% of our clients came through that channel. But over time that has evolved. So when I look at our client base right now, I would say roughly 50% are still wealthy, private individuals. But the other 50% are institutional clients. What made me really excited about the growth we saw in 2016 was that the interest for ultra-short came through both client channels.
BFI: Any thoughts on the future? Olsen: We're really positive about the future of ultra-short. I don't think the effects of the money market reform have fully played out yet. I still think we'll see plenty of interest from clients that are looking for something other than a prime money market fund.... The fact that the rates are going up also opens up ultra-shorts for another type of client -- those that are currently invested in longer duration bond funds. As rates move higher, ultra-short is a pretty powerful strategy to shorten your duration, keep your overall asset allocation in fixed income but decrease the effect of higher rates by shortening your duration. So we're really excited about the next couple of years, and we expect to be really busy in 2017.
Law firm Orrick's Structured Finance Group published the notice, "European Parliament Will Consider Money Market Fund Regulation in April 2017 Plenary Session." The brief says, "The European Parliament has announced that it will consider the MMF regulation during its upcoming plenary session, currently scheduled to be held April 3-6, 2017. The MMF regulation is intended to introduce new framework requirements to more effectively regulate money market funds, as well as increase their stability and general liquidity. In particular, the regulation (introduced by the European Commission) is intended to more tightly regulate the shadow banking sector. The plenary session will allow debate and potential amendment to the scope of the MMF regulation." (See our Jan. 24 News, "`Fitch's Sewell and Gkeka on Timing of European Money Fund Reforms.") We discuss Crane Data's latest MFI International and MFII Portfolio Holdings statistics below, and we also review a new set of AAAf ratings on LGIPs from Fitch Ratings. We also want to welcome to Boston those of you attending the inaugural Crane's Bond Fund Symposium, which takes place Thursday and Friday a.m. at the Hyatt Regency Boston. Watch for coverage in coming days and in the next issue of our Bond Fund Intelligence.
Crane Data's Money Fund Intelligence International shows assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Ireland or Luxemburg and denominated in USD, Euro and GBP (sterling), up $23 billion year-to-date to $755 billion as of 3/20/17. U.S. Dollar (USD) funds (156) account for over half ($414.0 billion, or 54.8%) of the total, while Euro (EUR) money funds (97) total E94.3 billion and Pound Sterling (GBP) funds (107) total L197.9. USD funds are up $16 billion, YTD, while Euro funds are flat and GBP funds are up L8B. USD MMFs yield 0.65% (7-Day) on average (3/20/17), up 49 basis points from 12/31/15. EUR MMFs yield -0.49% on average, down 30 basis points YTD, while GBP MMFs yield 0.18%, down 18 bps YTD.
Crane's latest Money Fund Intelligence International Portfolio Holdings data (as of 2/28/17) shows that European-domiciled US Dollar MMFs, on average, consist of 22% in Treasury securities, 22% in Commercial Paper (CP), 23% in Certificates of Deposit (CDs), 18% in Other securities (primarily Time Deposits), 12% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 30.3% of their portfolios maturing Overnight, 11.3% maturing in 2-7 Days, 20.8% maturing in 8-30 Days, 12.7% maturing in 31-60 Days, 9.5% maturing in 61-90 Days, 10.5% maturing in 91-180 Days, and 4.9% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (33.2%), France (14.5%), Canada (9.9%), Japan (9.6%), Australia (5.8%), Sweden (5.3%), Germany (4.4%), the Netherlands (4.2%), Great Britain (2.9%), Singapore (2.2%) and China (1.6%).
The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $98.7 billion (22.1% of total assets), Credit Agricole with $13.7B (3.1%), BNP Paribas with $13.4B (3.0%), Mitsubishi UFJ with $11.8B (2.6%), Toronto-Dominion Bank with $9.1B (2.0%), Canadian Imperial Bank of Commerce with $9.0B (2.0%), Natixis with $9.0B (2.0%), Credit Mutuel with $8.5B (1.9%), Federal Reserve Bank of New York with $8.3B (1.9%), Bank of Nova Scotia with $8.1B (1.8%),`Bank of Montreal <b:>`_ with $8.1B (1.8%), Societe Generale with $8.0B (1.8%), Sumitomo Mitsui Trust Bank with $7.8B (1.8%), Mizuho Corporate Bank LTD with $7.2B (1.6%), National Australia Bank Ltd with $7.2B (1.6%), Wells Fargo with $6.8B (1.5%), RBC with $6.6B (1.5%), Rabobank with $6.6B (1.5%), Sumitomo Mitsui Banking Co with $6.5B (1.4%), and Commonwealth Bank of Australia with $6.2B (1.4%).
Euro MMFs tracked by Crane Data contain, on average 44% in CP, 29% in CDs, 18% in Other (primarily Time Deposits), 6% in Repo, 2% in Treasury securities and 1% in Agency securities. EUR funds have on average 22.5% of their portfolios maturing Overnight, 6.9% maturing in 2-7 Days, 17.7% maturing in 8-30 Days, 18.6% maturing in 31-60 Days, 13.9% maturing in 61-90 Days, 16.9% maturing in 91-180 Days and 3.5% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (30.3%), US (13.4%), Japan (12.9%), Sweden (7.5%), Germany (7.2%), Netherlands (6.1%), Belgium (5.8%), Great Britain (3.4%), Switzerland (3.0%), and China (2.2%).
The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E5.9B (6.2%), Credit Agricole with E4.1B (4.3%), Proctor & Gamble with E3.8B (4.0%), Rabobank with E3.8B (4.0%), Svenska Handelsbanken with E3.7B (3.8%), Societe Generale with E3.1B (3.3%), Nordea Bank with E3.0B (3.2%), Credit Mutuel with E2.9B (3.1%), Mitsubishi UFJ Financial Group Inc with E2.7B (2.9%), BPCE SA with E2.7B (2.8%), KBC Group NV with E2.6B (2.8%), DZ Bank AG with E2.6B (2.7%), Agence Central de Organismes de Securite Sociale with E2.3B (2.4%), Dexia Group with E2.3B (2.4%), and Sumitomo Mitsui Banking Co. with E2.2B (2.3%).
The GBP funds tracked by MFI International contain, on average (as of 2/28/17): 41% in CDs, 27% in Other (Time Deposits), 21% in CP, 8% in Repo, 3% in Treasury, and 0% in Agency. Sterling funds have on average 22.0% of their portfolios maturing Overnight, 9.8% maturing in 2-7 Days, 13.2% maturing in 8-30 Days, 16.5% maturing in 31-60 Days, 15.2% maturing in 61-90 Days, 18.8% maturing in 91-180 Days, and 4.5% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (18.3%), Japan (15.6%), Great Britain (13.3%), Netherlands (9.5%), Germany (7.7%), Australia (6.9%), Sweden (5.2%), Canada (5.0%), US (4.7%), and Belgium (2.7%).
The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L7.5B (4.8%), Mitsubishi UFJ Financial Group Inc. with L7.0B (4.5%), Credit Agricole with L5.9B (3.8%), BNP Paribas with L5.8B (3.7%), Sumitomo Mitsui Banking Co. with L5.7B (3.6%), Rabobank with L5.4B (3.5%), Nordea Bank with L5.2B (3.3%), ING Bank with L5.1B (3.3%), DZ Bank AG with L4.8B (3.1%), Credit Mutuel with L4.4B (2.8%), BPCE SA with L4.3B (2.8%), Mizuho Corporate Bank Ltd. with L3.9B (2.5%), Qatar National Bank with L3.8B (2.4%), Commonwealth Bank of Australia with L3.7B (2.4%), Sumitomo Mitsui Trust Bank with L3.7B (2.4%), ABN Amro Bank with L3.5B (2.2%), National Bank of Abu Dhabi with L3.5B (2.2%), Erste Abwicklungsanstalt with L3.4B (2.2%), Standard Chartered Bank with L3.4B (2.2%), and Toronto-Dominion Bank with L3.4B (2.2%).
In other news, a press release entitled, "Fitch Rates Term Programs of Five Local Government Investment Pools Managed by PFM Asset Management," explains, "Fitch Ratings has assigned 'AAAf' Fund Credit Quality Ratings (FCQR) to the following term programs of five local government investment pools (LGIP) managed by PFM Asset Management LLC (PFMAM): Florida Education Investment Trust Fund - FEITF Term Series, Illinois Trust - Illinois TERM Series, Missouri Securities Investment Program - MOSIP TERM Series, Minnesota School District Liquid Asset Fund Plus - MSDLAF+ TERM Series, and TexasTERM Local Government Investment Pool - TexasTERM Series."
Fitch explains, "The term programs are fixed-rate, fixed-term portfolios with a maximum term of one year. Individual series will terminate within two years of their inception. The term programs are designed to meet the cash flow requirements of investors with the cash flows from the portfolio. Each term program consists of multiple series with staggered termination dates. The ratings reflect Fitch's review of the term programs' investment and credit guidelines, the portfolios' credit quality and diversification, as well as the capabilities of PFMAM as investment manager. The 'AAAf' FCQRs indicate the highest underlying credit quality (or lowest vulnerability to default)."
They add, "The pools are managed by PFMAM, a member of the PFM Group of companies. PFMAM is registered with the SEC under the Investment Advisers Act of 1940 and specializes in creating investment strategies and managing funds for public sector, not-for-profit and other institutional clients. The firm is based in Harrisburg, Pennsylvania."
This month, Money Fund Intelligence interviews Tim Huyck, Chief Investment Officer for Money Markets at Fidelity Investments. Fidelity is by far the largest manager of money funds with over $500 billion, almost double its next largest competitor. The company's history goes back to the earliest days of money funds (recently retired Chairman Edward "Ned" Johnson III played a key role in popularizing money funds), and Fidelity remains the most important player in the space. Our Q&A follows. (This interview is reprinted from the March issue of our flagship Money Fund Intelligence newsletter; e-mail info@cranedata.com to request the full issue.)
MFI: Tell us a little about your history. Huyck: Fidelity Daily Income Trust (FDIT) was the first money fund that we launched at Fidelity [in 1974], and it was the first money fund with check writing privileges... I joined Fidelity in September 1990, just before the move of the money market desk from Boston to Dallas. We were in Dallas for 7 years, and then in November of '97 we moved from Dallas to Merrimack. We're celebrating our 20-year anniversary here in Merrimack (NH) this year. I'm coming up on 27 years at Fidelity, and all but three of those years have been spent in money markets. I've traded; I've managed the trading desk; I basically had every trading role on the taxable money market desk. I managed most of the taxable money market funds that we had at some point or another. In 2014, I took over as CIO for the money market group, and I report into Nancy Prior.
Money funds are important to Fidelity because they are important to our customers. We have more than 11 million customers investing in Fidelity's money market mutual funds. Our market leadership position has grown over the course of the last several years, and has grown quite a bit since 2008. [Regarding our people] money funds at Fidelity are not a stepping stone into other asset classes. Money funds are a career at Fidelity.
Because it is an important part of our business, we commit a tremendous amount of resources to our money market business. From trading to portfolio management, to credit and quantitative research, we have a full team dedicated to the support of managing our money market funds. That includes a research team on the ground in London that is responsible for covering our foreign bank exposure. The team numbers 93 in total, including seven portfolio managers, 13 traders, 70 research analysts and associates and three quantitative analysts.
MFI: What is your biggest priority currently? Huyck: With reform behind us, we're able to focus our time on Fed policy and fiscal policy under the new Presidential Administration and Congress. There are a lot of open questions at this point. You can include credit in there too. The credit environment is pretty solid, [and] bank credit quality is as high as it’s been in years.
MFI: Are there any more changes that need to be done? Huyck: There aren't any changes in queue at the moment. However, we are, probably like many of our competitors, constantly reevaluating our product line. The industry had a tremendous amount of assets moving between fund types last year. So we will take a look at our fund lineup this year and make sure that it remains appropriate.
With respect to the movement of assets, we had close to $300 billion in assets move among our funds, and we've got a little over $500 billion under management. So a tremendous amount of money moved. But one of the things I'm particularly proud of was the ability of our team, and the overall industry, to handle that money movement. We were able to manage those flows and accommodate those flows without any disruption to the shareholders.... It went remarkably smoothly, given the amount of flows. I think it speaks volumes to the preparedness of the industry and the tremendous liquidity that is in the money markets.
MFI: What are your biggest challenges? Huyck: I would say a challenge may be too strong of a word. We have now roughly $400 billion in government assets. We are focused on getting those dollars invested. We've spoken publicly about the 2a-7 eligible universe of government securities, which is close to $7 trillion. So the eligible pool of investments is huge. At the same time, the demand is also big and growing.... Obviously, you've got $1 trillion more in demand that has shown up from money funds in the last year. Getting government assets invested is more of a rate story, than an availability story. The question is not whether you can get the funds invested, but what rate do you have to pay to get access to that government supply?
The market has seen the spread in government and prime funds expand. Historically, the spread between prime funds and government funds has been 10-12 basis points. That spread has moved to 35-40 basis points now. So, that's a result of less demand in the prime area, and more demand in government money market securities suppressing the yields on government securities. Customers are showing increased interest in prime funds ... now that the spread is 35-40 basis points. Some customers are considering moving back, and as you've pointed out, institutional prime assets industrywide are up almost $20 billion YTD. [But] clients still have questions about what their investment guidelines allow. Many ... said 'We're going to move from prime to government for the initial transition and revisit the investment strategy later.' That 'later' is starting to happen now.
MFI: What are you buying now? Huyck: We've been very active in floating rate securities, in both the government and prime funds. Futures markets are predicting multiple rate moves from the Fed in 2017. So we think floaters will perform well as the Fed continues to move rates higher. Treasuries are another security where we've been very active. We hold a lot more in Treasury securities now than we did a year ago.
MFI: Are customers noticing the yields? Huyck: It certainly makes for easier conversations with customers when you can tell them you're paying them more than just a basis point. Shareholders and investment professionals tell us they're excited about potential for increased investment yields. It's not a lot, but in some cases it hits 40, 50, 60, 70 basis points, in net yields that money funds are paying.... Bank deposits since 2008 have grown nearly $4.5 trillion dollars. We looked at some FDIC data that suggested that the rate on bank demand deposit accounts hasn't varied at all over the course of last year and a half.... So when bank deposits were paying [roughly] 15-20 basis points and money funds were paying a basis point, the marginal dollars generally went into banks. That investment calculus may start to change if money fund yields continue higher.
As market rates rise in a rising rate environment in the short end, money funds have historically grown in those types of environments because banks are slower to raise their administered rates. This could be a potential source of ... demand for money market funds as fund yields continue to rise.
MFI: Talk about ultra-short bond funds. Huyck: We had a very good year in both our taxable and municipal Conservative Income Bond (CIB) funds. The Conservative Income Municipal Bond Fund, which passed its three-year anniversary in October, has grown to over $1 billion. The taxable fund also grew tremendously last year.... Clients are asking a lot about [these].... Prime money funds are no longer a one-stop shop where investors can get their return, liquidity, and stable NAV. So we’ve talked a lot about segmenting cash. Some clients are choosing to invest operational cash in a government money market fund, while investing shorter-term strategic cash in a prime money fund, and investing longer term strategic cash in a conservative income bond fund.
Note though that as the Fed continues to hike, the Prime to CIB spread has tightened.... So variable NAV prime funds have gotten closer to that conservative income yield. That will be something to keep an eye on too, not only the government to prime spread but also the prime to CIB spread.... We're not trying to reinvent or manage funds to "old 2a-7." We want to be very clear that these conservative income bond funds are just that, they're bond funds.
MFI: What is your outlook? Huyck: I think the future for money market funds is pretty bright, as bright as it's been in a while. We've gotten reform behind us, the Fed has told us they're going to move rates higher three times this year, [and] the credit markets are relatively subdued.... Typically in an environment where the Fed is moving rates higher ... that has been an environment where money is coming into money market funds. So the extent that we do get ... Fed hikes this year, I think it's reasonable to expect the industry to grow.
Our guiding principles for money market fund management since the day we started [have been] safety, followed by liquidity, followed by return, and in that order. I think it became very apparent that shareholders view money market funds the same way. If return [been] higher on the pecking order of what investors were seeking in money funds, the industry would be a fraction of what it is. I think it really speaks again to the value of proposition of money funds. Shareholders still find MMFs useful and valuable in ways that yield can't measure.
The Federal Reserve Bank of New York's Liberty Street Economics blog published a piece entitled, "Money Market Funds and the New SEC Regulation." It says, "On October 14, 2016, amendments to Securities and Exchange Commission (SEC) rule 2a-7, which governs money market mutual funds (MMFs), went into effect. The changes are designed to reduce MMFs' susceptibility to destabilizing runs and contain two principal requirements. First, institutional prime and muni funds—but not retail or government funds—must now compute their net asset values (NAVs) using market-based factors, thereby abandoning the fixed NAV that had been a hallmark of the MMF industry. Second, all prime and muni funds must adopt a system of gates and fees on redemptions, which can be imposed under certain stress scenarios. This post studies the effect of the amendments on the size and composition of the MMF industry and, in particular, whether MMF investors shifted their assets from prime and muni funds toward government funds in anticipation of the tighter regulatory regime."
The NY Fed's blog continues, "Using month-end data from public regulatory filings by MMFs from January to November 2016 (the SEC Form N-MFP), we show that the relative size of prime and muni versus government funds has changed dramatically even as overall total net assets (TNA) of the industry have been roughly stable. Indeed, as the chart and table below show, TNA in the prime and muni segment of the MMF industry have fallen by more than half, with TNA declining $1.120 trillion, whereas those in the government segment have increased by $1.032 trillion; as a result, the share of overall TNA invested in government funds has soared in the space of ten months, from 41 percent to 76 percent."
They tell us, "Given the large shifts into government funds from prime and muni funds, it's interesting to understand whether investors chose to keep their assets within their original family of funds; understanding this sheds light on whether the reforms had a meaningful impact on the overall assets of individual fund complexes. Although it is difficult to track where exact flows come from and go within the MMF industry, the data suggest that investors largely remained within their chosen fund complex."
Authors Catherine Chen, Marco Cipriani, Gabriele La Spada, Philip Mulder, and Neha Shah explain, "Each data point in the chart below represents one fund family; on the horizontal axis, we have the outflow from prime and muni funds in the family, whereas on the vertical axis we have the inflow into government funds. For most fund complexes, the outflow from prime and muni funds matches almost one for one the inflow into government funds; indeed, a regression of the inflow to government funds on the outflow from prime and muni funds gives a coefficient of almost exactly one (1.04)."
They add, "Investors in the prime and muni segment of the MMF industry are likely to have a higher appetite for yield and a higher tolerance for risk than government MMF investors. One may expect that, given their risk preferences, those investors who moved their assets to government funds would concentrate on the segment of the government fund industry that provides a higher yield. The data support this hypothesis."
The blog states, "There are two types of government funds: agency funds, investing in Treasuries, agency debt, and repos backed by these securities, and Treasury funds, investing only in Treasuries and Treasury repos. Historically, agency funds have delivered higher yields; for instance, since November 2010 when the SEC started collecting the N‑MFP data, the average yield on agency funds has exceeded that for Treasury funds by 7 basis points."
It tells us, "[T]he Treasury share of the MMF industry has remained roughly flat; in contrast, the share of agency MMFs has increased from 24.4 percent of the overall industry to 55.4 percent. In other words, investors have moved to the segment of the government MMF industry that is closer (in terms of yield) to the prime and muni segment. They have likely done so in order to avoid the potential for liquidity gates and fees, and in the case of institutional investors, to keep the desirable feature of a fixed NAV, while at the same time maximizing the yield from their MMF investment."
Finally, the Liberty Street posting concludes, "Overall, investors' shift from prime and muni funds to government -- and, in particular, agency -- funds means that a large segment of the industry still operates under a stable NAV (and therefore is, in principle, vulnerable to runs). Yet, financial institutions tend to suffer runs when their investments have gone, or are perceived to have gone, sour (as was the case in 2008, after Lehman Brothers' bankruptcy); indeed, government funds, which invest in safer assets than prime funds, did not experience any run in 2008. Since the new regulations have resulted in a very large shift of assets into relatively safe government funds, the SEC's reforms have made runs on MMFs less likely and the industry itself more resilient."
In other news, Fund Action writes, "Embattled Money Funds Eye Modest Resurgence." It says, "Money market fund managers expect renewed investor interest following the Federal Reserve's interest rate hike last week, and further rate hikes are expected this year. The pace of assets returning to prime and municipal money market funds from government funds is likely to be slow, however, as investors get used to changes imposed by money market reform, money fund managers told FA."
The piece adds, "Peter Crane, editor and publisher of Crane Data and Money Fund Intelligence, told FA, 'Presumably, prime [funds] are going to go up a little more, and government funds will go up a little less than 25 basis points, so the spread should grow.'"
FA quotes Tracy Hopkins, chief operations officer of BNY Mellon's cash strategies division, "I do think, especially in the prime space, for example, it's going to be a slow go.... It will take time for customers to get comfortable with the small variations in price along with greater yield spreads between prime and government treasury funds before moving back into these asset classes."
The U.S. Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary late last week, which shows that total assets increased in February, with Prime funds gaining $24.9 billion (after gaining $11.7B in Jan.), Tax Exempt MMFs losing $0.6 billion and Government funds losing $10.1 billion. Gross yields continued higher for Taxable MMFs, but declined again for Tax Exempt MMFs. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends.
Money market fund assets increased by $14.2 billion in February to $2.931 trillion. (The SEC's series includes some private and internal funds not reported to ICI or other reporting agencies, though Crane Data is in the process of adding many of these to our collections.) Overall assets decreased by $41.1 billion in January and $16.6 billon in December, but increased by $60.1 billion in November. Over 12 months through 2/28/17, total MMF assets declined by $191.1 billion, or 6.1%.
Of the $2.931 trillion in assets, $587.0 billion was in Prime funds, which increased by $24.9 billion in February to their highest level since Sept. 2016. Prime MMFs increased $11.7 billion in Jan., decreased $15.5 billion in December, increased $3.4 billion in Nov., and decreased by $177.4 billion in October, $293.2 billion in Sept., and $201.3 billion in August. Prime funds represented 20.0% of total assets at the end of February. They've declined by $999.7 billion the past 12 months, or 63.0%.
Government & Treasury funds totaled $2.210 billion, or 75.4% of assets,, down $10.1 billion in February. They fell $53.8 billion in January and $10.2 billion in Dec., but rose $56.4 billion in November, $148.0 billion in October, $268.3 billion in Sept., and $212.0 billion in August. Govt & Treas MMFs are up $922.2 billion over 12 months (71.6%). Tax Exempt Funds decreased $0.6 billion to $134.8 billion, or 4.6% of all assets. The number of money funds was 411, unchanged from last month and down 85 from 2/28/16.
Yields were mixed in February for Taxable MMFs. The Weighted Average Gross 7-Day Yield for Prime Funds on Feb. 28 was 0.91%, unchanged from the previous month, but almost double the 0.53% of January 2016. Gross yields increased to 0.61% for Government/Treasury funds, up 0.01% from the previous month and up 0.24% since 2/16. Tax Exempt Weighted Average Gross Yields decreased 0.02% in February to 0.70%, but they've risen 62 bps since 2/28/16).
The Weighted Average Net Prime Yield was 0.678, up 0.01% from the previous month and up 0.36% since 2/16. Over 12 months, 7-day gross yields for Prime are up 38 basis points (to 0.91%) but unchanged from last month. (They should jump in March though given last week's Fed hike.) The Weighted Average Prime Expense Ratio was 0.23% in February (down one bps from January). Prime expense ratios have risen from 0.21% in February 2016. (Note: These averages are asset-weighted.)
Both WAMs and WALs shortened again in February. The average Weighted Average Life, or WAL, was 58.6 days (down 1.8 days from last month) for Prime funds, 93.3 days (down 2.9 days) for Government/Treasury funds, and 26.0 days (down 0.9 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 29.3 days (down 1.5 days from the previous month) for Prime funds, 40.9 days (down 2.6 days) for Govt/Treasury funds, and 23.1 days (down 1.4 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 32.3% in February (down 1.3% from previous month). Total Weekly Liquidity was 50.2% (up 0.2%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $66.5 billion, followed by France with $62.1 billion. The U.S. was third with $53.9B, followed by Japan with $44.9 billion, Sweden ($42.0B), Australia/New Zealand with $35.3B, Germany ($26.5B) and the UK ($20.6B). The Netherlands ($16.4B) and Switzerland ($12.0B) rounded out the top 10.
The only gainers among Prime MMF bank related securities for the month included: France (up $7.0 billion), Sweden (up $3.2B), Norway (up $2.9B), Aust/NZ (up $2.3B), Canada (up $2.2B), Other (up $1.7B), Japan (up $1.2B), Germany (up $1.2B), Belgium (up $436M), Switzerland (up $276M), Singapore (up $226M), and Spain (up $216M). The biggest drops came from the US (down $4.1B), the UK (down $3.5B), the Netherlands (down $405M), and China (down $268M). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $204.2B (up $12.3B from last month), while the Eurozone subset had $116.0 billion (up $8.4B). The Americas had $121.2 billion (down from $122.9B), while Asian and Pacific had $90.2 billion (down from $86.2B).
Of the $583.7 billion in Prime MMF Portfolios as of Feb. 28, $244.0B (41.8%) was in CDs (up from $232.3B), $109.1B (18.7%) was in Government securities (including direct and repo), up from $105.9B, $104.0B (17.8%) was held in Non-Financial CP and Other Short Term Securities (the same as last month), $94.7B (16.2%) was in Financial Company CP (up from $86.9B), and $31.9B (5.5%) was in ABCP (up from $31.9B).
The Proportion of Non-Government Securities in All Taxable Funds was 17.4% at month-end, up from 16.8% the previous month. All MMF Repo with Federal Reserve increased to $194.0B in February from $165.2B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 36.0% were in maturities of 60 days and over (down from 38.1%), while 7.0% were in maturities of 180 days and over (up from 6.9%).
The Investment Company Institute released its latest weekly "Money Market Mutual Fund Assets" report and monthly "Money Market Fund Holdings" summary (with data as of Feb. 28, 2017) yesterday. The former shows Prime assets decreasing for the first week in six, while the latter, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds, shows Prime assets and European-related holdings increasing again last month. (See our March 10 News, "March Money Fund Portfolio Holdings Show Continued Credit Recovery.")
ICI's MMF Assets release says, "Total money market fund assets decreased by $11.66 billion to $2.68 trillion for the week ended Wednesday, March 15, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $10.90 billion and prime funds decreased by $750 million. Tax-exempt money market funds decreased by $10 million." Total Government MMF assets, which include Treasury funds too stand at $2.152 trillion (80.4% of all money funds), while Total Prime MMFs stand at $390.5 billion (14.8%). Tax Exempt MMFs total $131.8 billion, or 4.9%.
It explains, "Assets of retail money market funds increased by $2.81 billion to $982.73 billion. Among retail funds, government money market fund assets increased by $1.76 billion to $603.04 billion, prime money market fund assets increased by $1.04 billion to $253.84 billion, and tax-exempt fund assets were unchanged at $125.86 billion." Retail assets account for over a third of total assets, or 36.7%, and Government Retail assets make up 61.4% of all Retail MMFs.
The release continues, "Assets of institutional money market funds decreased by $14.47 billion to $1.69 trillion. Among institutional funds, government money market fund assets decreased by $12.67 billion to $1.55 trillion, prime money market fund assets decreased by $1.78 billion to $141.01 billion, and tax-exempt fund assets decreased by $20 million to $4.97 billion." Institutional assets account for 63.3% of all MMF assets, with Government Inst assets making up 91.4% of all Institutional MMFs.
ICI's statistics show Prime money fund assets dipping slightly after rising to their highest level since October 12, 2016, the previous week.`Given that March 15 is a corporate tax payment date, though, we believe the slow-motion Prime recovery remains intact <b:>`_. Prime MMFs have increased in seven of the past nine weeks, rising by $14.9 billion, or 3.9% since 12/21/16. Government money market fund assets have fallen in seven out of nine weeks, declining by $65.5 billion, or 3.0%. Institutional assets accounted for all of the gains in Prime (up $14.5 billion), and almost all Government declines (down $62.4 billion).
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in February, prime money market funds held 24.2 percent of their portfolios in daily liquid assets and 43.7 percent in weekly liquid assets, while government money market funds held 57.4 percent of their portfolios in daily liquid assets and 74.4 percent in weekly liquid assets." Prime DLA rose from 24.0% last month and Prime WLA fell from 44.6% last month.
It explains, "At the end of February, prime funds had a weighted average maturity (WAM) of 33 days and a weighted average life (WAL) of 67 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 41 days and a WAL of 94 days." Prime WAMs were down two days from the prior month, and WALs were also down by one day. Govt WAMs decreased by 3 days and WALs decreased by 3 days as well.
Regarding Holdings By Region of Issuer, ICI adds, "Prime money market funds' holdings attributable to the Americas declined from $165.15 billion in January to $165.11 billion in February. Government money market funds' holdings attributable to the Americas declined from $1,812.90 billion in January to $1,796.33 billion in February."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $165.1 billion, or 41.6%; Asia and Pacific at $78.9 billion, or 19.9%; Europe at $149.1 billion, or 37.6%; and, Other (including Supranational) at $3.5 billion, or 1.0%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.796 trillion, or 83.2%; Asia and Pacific at $81.4 billion, or 3.8%; and Europe at $280.1 billion, or 13.0%.
The release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data. The report includes all money market funds registered under the Securities Act of 1933 and the Investment Company Act of 1940, that are publicly offered. All master funds are excluded, but feeders are apportioned from the corresponding master and included in the report."
In related Holdings news, a release entitled, "U.S. OFR Money Market Fund Monitor Data for February" says, "The U.S. Office of Financial Research has refreshed the Money Market Fund Monitor with data through Feb. 28.... This monitor is designed to track the investment portfolios of money market funds by funds asset types, investments in different countries, counterparties, and other characteristics. Users can view trends and developments across the MMF industry. Data are downloadable and displayed in six interactive charts."
Finally, see the article "Investors Return to Prime Money Market Funds," which says, "Money Market funds continued to experience net redemptions in February, but at a more favorable level of $2.0 billion compared to $44.6 billion of outflows in January. Among Taxable Money Market funds, prime funds led inflows at $9.9 billion, while treasury and government funds saw outflows of $4.5 billion and $7 billion, respectively. Bifurcation in demand within this space had previously favored government funds, driven by money market fund regulation."
The Federal Reserve raised short-term interest rates again yesterday, their second hike in 3 months and just the third in 10 years. Money fund investors and managers should benefit almost immediately, as rates are expected to move higher immediately following the move. Currently, money funds have an average weighted average maturity (WAM) of 35 days, so funds should reflect the 25 basis point higher yields fully in just over a month. Average yields for money funds are currently 0.50%, as measured by our Crane 100 MF Index, so yields hould move towards 0.75% over the coming weeks. The highest-yielding money funds, currently 0.8-0.9%, should break over 1.0% within weeks. Given expectations for even more Fed hikes in 2017, money fund yields, and revenues (as fee waivers melt away), are looking up for 2017. We review the Fed move and statements below.
The FOMC's Statement says, "Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace.... In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation."
It explains, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
The FOMC adds, "The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."
Federal Reserve Chair Yellen says in her press conference statement, "Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 3/4 to 1 percent. Our decision to make another gradual reduction in the amount of policy accommodation reflects the economy's continued progress toward the employment and price stability objectives assigned to us by law. For some time the Committee has judged that, if economic conditions evolved as anticipated, gradual increases in the federal funds rate would likely be appropriate to achieve and maintain our objectives. Today's decision is in line with that view and does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy."
She continues, "Returning to monetary policy, the Committee judged that a modest increase in the federal funds rate is appropriate in light of the economy's solid progress toward our goals of maximum employment and price stability. Even after this increase, monetary policy remains accommodative, thus supporting some further strengthening in the job market and a sustained return to 2 percent inflation. Today's decision also reflects our view that waiting too long to scale back some accommodation could potentially require us to raise rates rapidly sometime down the road, which, in turn, could risk disrupting financial markets and pushing the economy into recession <b:>`_."
Yellen also says, "We continue to expect that the ongoing strength of the economy will warrant gradual increases in the federal funds rate to achieve and maintain our objectives. That's based on our view that the neutral nominal federal funds rate--that is, the interest rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel--is currently quite low by historical standards. That means that the federal funds rate does not have to rise all that much to get to a neutral policy stance. We also expect the neutral level of the federal funds rate to rise somewhat over time, meaning that additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion. Even so, the Committee continues to anticipate that the longer-run neutral level of the federal funds rate is still likely to remain below levels that prevailed in previous decades."
She adds, "This view is consistent with participants' projections of appropriate monetary policy. The median projection for the federal funds rate is 1.4 percent at the end of this year, 2.1 percent at the end of next year, and 3 percent at the end of 2019, in line with its estimated longer-run value. Compared with the projections made in December, the median path for the federal funds rate is essentially unchanged. As always, the economic outlook is highly uncertain, and participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to their economic outlooks and views of the risks to their outlooks."
The Wall Street Journal commented, "The Federal Reserve said Wednesday it would raise short-term interest rates and keep lifting them this year, moving the central bank into a new, more aggressive phase of draining easy money from the financial system as the economy improves. Officials said they would raise their benchmark federal-funds rate by a quarter percentage point to a range between 0.75% and 1%, and penciled in two more increases this year."
The article adds, "Nearly seven in 10 economists polled by The Wall Street Journal expect the second rate increase in June, while one in five expect it in September. How interest rates -- on savings accounts, auto loans, mortgages, credit cards and corporate loans - rise from here depends on how investors, consumers and businesses respond. Rates for credit cards are tied to the prime rate -- set by banks for their best customers -- which is more directly linked to federal-funds rate."
Capital Advisors Group published a paper entitled, "Demystifying Private Liquidity Funds," which reviews a recent SEC paper on Private Liquidity Funds and recent SEC Statistics on this over $500 billion and little noticed segment of the money markets. CAG's Lance Pan explains, "Important regulatory changes to institutional prime money market funds are forcing new ideas and new interest in prime fund alternatives. With the SEC Form PF aggregate data, we reconstructed a profile of unregistered private liquidity funds promising investors stable $1.00 NAVs without liquidity gates. We discuss the drawbacks with private funds as being unfamiliar to the institutional cash community, the mishap with a large fund during the financial crisis, the vulnerable liquidity model, the requirement for investor sophistication, poor transparency, the risk of liquidity lockups and share suspensions, and their uncertain future related to systemic concerns."
Regarding the "Potential Benefits to Institutional Cash Investors," Pan says, "With the cursory knowledge described above, one may deduce that private funds resemble money market funds but with less SEC oversight, more management flexibility, and perhaps a specialized shareholder makeup using the funds for special purposes.... At the risk of generalizing an asset class hidden from public view, we think private funds may be beneficial to institutional cash investors in the following respects."
These include: "Stable Net Asset Values: A private fund's ability to be free of the SEC's fair value pricing requirement, and instead valuing portfolio holdings at their amortized costs.... No Redemption Gates: This statement may be inaccurate as of June 2016, because the staff paper found 93% of the Section 3 funds could suspend redemptions and 80% had lock-up (gating) provisions.... Self-Reported Compliance with 2a-7: It is also possible that private funds targeting money market fund investors will claim partial compliance with Rule 2a-7, though they are not required to do so as unregistered funds.... [and] Manager Flexibility and Higher Yield Potential: Some private liquidity funds may appeal to certain investors interested in higher yield potential than in a regulated prime fund."
Among the "Risk Concerns," Pan cites: "A New Concept that Lacks a Following: Despite an established history in other segments of the investor base, private liquidity funds designed to circumvent certain Rule 2a-7 limitations are a relatively new phenomenon for corporate cash investors. Shareholder distribution as reported in the SEC statistics revealed virtually no participation by non-financial corporations, educational or municipal entities. Size may be another impediment, as we are not aware of any funds targeting corporate and municipal shareholders with assets greater than $1 billion, an important milestone to gain institutional following. Insufficient public data and an insufficient track record also add to the impediment."
He also lists: "Guilt by Association: Memory of the $34 billion Columbia Strategic Cash Portfolio, the poster child for a private liquidity fund gone bad, is still fresh in the minds of many a decade after the fund's demise. While some are quick to set apart today's private funds from their "ancient" brethren, the funds' legal structures, regulatory framework (other than Form PF) and shareholder concerns have not changed much. Complex Legal Structure: Private funds are not for everyone, legally at least. The SEC limits shareholders in private funds exempt under Section 3(c)1 of the Investment Company Act [or] Section 3(c)(7).... Such complexities often result in offering documents for supposedly simple liquidity products that are several hundred pages long."
Capital Advisors also mentions as risks: "Investor Sophistication; A Vulnerable Liquidity Model: Our main reservation towards private funds is our understanding of the "public liquidity in a private fund" model, which may be incompatible with some investors.... A Step Back in Transparency: The lack of portfolio transparency may lead shareholders to redeem shares indiscriminately first and ask questions later in times of uncertainty, as they did in 2008.... Risk of Suspended Redemptions and Gates: It may be unfortunate for investors fleeing redemption gates in prime funds only to be met by lockups (gates) or suspended redemptions in private funds.... Faced with the two choices, we think investors may be better off with the 2a-7 gate where, if a fund board chooses to impose one, the SEC allows the gate to be in place no longer than 10 business days in a 90-day period."
The Capital Advisors piece concludes, "Important regulatory changes to institutional prime money market funds are forcing new ideas and new interest in prime fund alternatives. One such alternative is private liquidity funds, for which the SEC has disclosed some aggregate level information from the Form PF filing. The private liquidity funds relevant to institutional cash investors are unregistered private assets pools, legally available only to sophisticated investors, that seek to maintain $1.00 stable NAV but without liquidity gates, that may pledge some level of compliance with Rule 2a-7. Other than the NAV and gates characteristics and the exemption from SEC registration, the private funds have the look and feel of regular money market funds."
They add, "We discussed several potential drawbacks with private funds as being unfamiliar to the institutional cash community, the mishap with a large fund during the financial crisis, the vulnerable liquidity model, the requirement for investor sophistication, poor transparency, the risk of liquidity lockups and share suspensions, and their uncertainty related to systemic concerns. We recognize the merit of private liquidity funds for certain sophisticated investors in special circumstances. While much remains to be learned of this revamped product, we caution the general treasury management community against plunging in before fully understanding the legal complexity and liquidity risk profile."
The SEC's paper, "`Private Liquidity Funds: Characteristics and Risk Indicators," written by Daniel Hiltgen, says in its "Abstract," "At the end of 2015, $534 billion in assets were held by private liquidity funds or managed in their parallel accounts that follow similar investment mandates as money market mutual funds (MMFs), but are unregistered. Limited information is publically available about these funds that are in AUM terms roughly a quarter of the size of institutional MMFs. This white paper characterizes these private liquidity funds using data from Form PF and compares them to MMFs."
Finally, the SEC's "Private Funds Statistics, Second Calendar Quarter 2016" says, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings <b:>`_. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers." (Editor's Note: Crane Data believes that the vast majority of these assets are securities lending reinvestment cash, and that these "private liquidity funds" are not the same as some new ones that are being marketed to corporate investors.)
The March issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Tuesday, features the lead story, "Bond Fund Inflows Back w/a Vengeance in 2017 After Dip," which tells readers that, "Inflows into bond funds ... are running at one of their strongest paces ever." It also includes the interview, "Northern Trust's Morten Olsen Talks Ultra-Shorts." In addition, we recap the latest Bond Fund News, including briefs such as, "Bond Fund Returns Up Again in Feb.; Yields Flat, Down." BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the latest issue below. (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence and BFI XLS data spreadsheet.) Finally, we look forward to seeing those of you attending the inaugural Crane's Bond Fund Symposium next week (March 23-24) in Boston!
Our lead Bond Fund Intelligence story says, "Inflows into bond funds in the first 2 months of 2017 are running at one of their strongest paces ever. Based on the Investment Company Institute's numbers, bond funds have attracted over $72 billion YTD. This represents a stark contrast to the end of 2016, where we experienced a rare 2-month stretch of outflows. We take a more detailed look at the most recent flow data, as well as historical flows and asset trends, below.
It continues, "ICI's monthly "Trends" shows bond fund assets rising by $43.6 billion to $3.693 trillion in January. During 2016, bond fund assets rose by $235.9 billion, or 6.9%. The monthly ICI release says, "Bond funds had an inflow of $21.55 billion in January, compared with an outflow of $10.19 billion in December. Taxable bond funds had an inflow of $17.43 billion in January, versus an inflow of $7.46 billion in December. Municipal bond funds had an inflow of $4.13 billion in January, compared with an outflow of $17.64 billion in December."
Our latest fund "Profile" says, "This month, Bond Fund Intelligence speaks with Morten Olsen, Director of Ultra-Short Fixed Income at Northern Trust Asset Management. Olsen oversees Northern's ultra-short bond fund lineup, including the $2.1 billion Northern Ultra Short Fixed-Income (NUSFX) and the $3.5 billion Northern Tax-Advantaged Ultra-Short Fixed-Income (NTAUX). We discuss fund strategies, rates, risks and the future of ultra-short bond funds below. Olsen expects a very busy 2017 for the sector."
BFI asks, "How long have you been running ultra-shorts?" Olsen answers, "Northern Trust has been running ultra-short strategies since the late 1980's. Ultra-short is part of our broader liquidity management capabilities at Northern Trust Asset Management, which currently total approximately $225 billion in AUM. Our liquidity management capabilities include government and prime money market funds, as well as ultra-short strategies. Common across all these strategies is our conservative investment approach, which focuses on credit research and risk management. I have 13 years of experience in the fixed income industry. I joined Northern Trust back in 2009 in the London office, and in May of 2016 I took over as director of ultra-short based here in Chicago."
The piece also says, "Tell us about the funds. Olsen explains, "We have two mutual funds. They were started back in 2009 and have a combined AUM of $5.5 billion. The two funds differ in their strategies, and therefore attract a different client base. The taxable mutual fund focuses on corporate bonds and on Treasury securities, and the tax-advantaged fund focuses mainly on municipal securities but will also add corporate bonds. The tax-advantaged strategies will only add corporate bonds when the after-tax yields of these are favorable compared to a tax-free municipal bond."
He adds, "Ultra-short falls under our cash segmentation strategy, which is a way for our clients to bucket their cash. The three buckets are: operational cash, which is for day-to-day needs -- a client should typically be investing into a government fund for this portion; reserve cash, which is for intermediate needs -- this portion should be invested into a prime money market fund; then the last bucket, strategic cash. That's where ultra-short really becomes interesting. Strategic cash has a horizon of up to 6 to 18 months, and using an ultra-short strategy is a way for our clients to earn a bit higher yield while only taking limited additional risk. I think the important point here is we don't view ultra-short as a substitute for a money fund. We look at it as a complementary product."
Our Bond Fund News brief on "Bond Fund Returns" explains, "Returns rose across all of the Crane BFI Indexes. Our BFI Total Index averaged a 1-month return of 0.61% and gained 4.29% over 12 months. The BFI 100 had a return of 0.73% in Feb. and rose 5.15% over 1 year. The BFI Conservative Ultra-Short Index returned 0.02% and was up 1.17% over 1-year; the BFI Ultra-Short Index had a 1-month return of 0.13% and 1.81% for 12 mos. Our BFI Short-Term Index returned 0.24% and 2.99% for the month and past year. The BFI High Yield Index increased 1.06% in Feb. and is up 15.86% over 1 year."
Another brief, "ICI Says 46% Own Bond Funds," says, "The Investment Company Institute published, "Profile of Mutual Fund Shareholders, 2016," which shows that 43.6% of the 125.8 million U.S. households own mutual funds (54.8 million). Of these, 86% own equity funds, 35% own balanced funds, 46% own bond funds (up from 42% the previous year), and 55% own money funds. This means 25.2 million households own bond funds."
Finally, a sidebar entitled, "MStar on Low Risk Funds," explains, "Morningstar keeps the bond fund commentary coming with "8 Incredibly Low-Risk Bond Funds." This piece explains, "Low-risk bond funds are a handy thing. If you are putting away money for a near-term expenditure like tuition in a couple of years or a house in three years, low-risk bond funds, along with money markets and certificates of deposit, can serve a valuable purpose.... But you don't want to make them a big part of a long-term portfolio, as they might not even keep up with inflation."
The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds") late last week. Among the 4 tables it includes on money market mutual funds, the Fourth Quarter, 2016 edition shows that the Household Sector remains the largest investor segment, as assets here jumped and retook the $1.0 trillion level in Q4. Nonfinancial Corporate Businesses and Funding Corporations (primarily Securities Lending money) remained the second and third largest segments, with the former rising and the latter falling sharply in the latest survey. State & Local Governments, Private Pension Funds, Rest of World, and Nonfinancial Noncorporate Business were the next largest segments, and these all remained relatively flat in the latest quarter. Businesses, Local Govts and Pension Funds showed increases over the past 12 months, while Household holdings of MMFs declined over the past year. We review the latest Fed Z.1 numbers, and we also review a new publication on Repo from the OFR, below.
The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows total assets increasing by $56 billion, or 2.1%, in the fourth quarter to $2.728 trillion. Over the year through Dec. 31, 2016, assets are down $27 billion, or -1.0%. The largest segment, the Household sector, totals $1.023 trillion, or 37.5% of assets. The Household Sector increased by $51 billion, or 5.2%, in the quarter, after decreasing $13 billion in the 3rd quarter and $50 billion in Q2'16. Over the past 12 months through Dec. 31, Household assets are down $45 billion, or 4.2%. Household assets remain well below their record level of $1.581 trillion (from year-end 2008).
Nonfinancial Corporate Businesses were the second largest investor segment, according to the Fed's data series, with $583 billion, or 21.4% of the total. Business assets in money funds increased $8.0 billion in the quarter, or 1.4%, and have risen by $6 billion over the past year, or 1.1%. Funding Corporations remained the third largest investor segment with $445 billion, or 16.3% of money fund shares. They decreased by $12 billion in the latest quarter and decreased $1 billion over the previous 12 months.
The fourth largest segment, State and Local Governments held 6.7% of money fund assets ($183 billion) -- up $1 billion, or 0.7%, for the quarter, and up $6 billion, or 3.2%, for the year. Private Pension Funds, which held $156 billion (5.7%), remained in 5th place. Rest Of The World category was the sixth largest segment in market share among investor segments with 4.2%, or $113 billion, while Nonfin Noncorp Business held $98 billion (3.6%), Life Insurance Companies held $56 billion (2.1%), State and Local Government Retirement Funds held $52 billion (1.9%), and Property-Casualty Insurance held $19 billion (0.7%), according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in "Debt Securities," or Credit Market Instruments, with $1.746 trillion, or 64.0%. Debt securities includes: Open market paper ($104 billion, or 3.8%; we assume this is CP), Treasury securities ($796 billion, or 29.2%), Agency and GSE backed securities ($678 billion, or 24.8%), Municipal securities ($162 billion, or 5.9%), and Corporate and foreign bonds ($6 billion, or 0.2%).
Other large holdings positions in the Fed's series include Security repurchase agreements ($800 billion, or 29.3%) and Time and savings deposits ($147 billion, or 5.4%). Money funds also hold minor positions in Foreign deposits ($2 billion, or 0.1%), Miscellaneous assets ($4 billion, or 0.1%), and Checkable deposits and currency ($30 billion, 1.1%). Note: The Fed also recently added a new breakout line to this table which lists "Variable Annuity Money Funds;" they currently total $36 billion, up $1 billion in the quarter.
During Q4, Treasury Securities (up $161 billion), Agency- and GSE-Backed Securities (up $35 billion), and Municipal Securities (up $6 billion) showed increases. Security Repurchase Agreements (down $56 billion), Time and Savings Deposits (down $47 billion), Checkable Deposits and Currency (down $20 billion), and Open Market Paper (down $10 billion), all showed declines.
Over the 12 months through 12/31/16, Time and Savings Deposits (down $298B), Open Market Paper (down $195B), and Municipal Securities (down $106B) all showed huge declines due to the massive shift from Prime and Tax-Exempt money funds to Government MMFs. Treasury Securities (up $210B), Agency- and GSE-Backed Securities (up $210B), and Security Repurchase Agreements (up $164B) all showed major gains in 2016.
In other news, the U.S. Treasury's Office of Financial Research published a paper entitled, "Benefits and Risks of Central Clearing in the Repo Market." The summary says, "Recent regulatory changes have raised the cost of activity in the repurchase agreement (repo) market for bank-affiliated dealers. Many transactions between dealers are centrally cleared. Expanding the use of central clearing to transactions between dealers and nondealers could reduce costs and improve market access for market participants. But what are the trade-offs? Data from the Office of Financial Research's interagency bilateral repo data collection pilot indicate that dealers could reduce their risk exposures if repo transactions by nondealer clients were centrally cleared. But the potential risks that central counterparties themselves face from larger exposures would also increase."
The piece explains, "A repo is the sale of a security with a commitment to buy it back later at a set price. Dealers obtain trillions of dollars in funding from repo markets on a daily basis. Repo markets were under stress during the 2007-09 financial crisis. Regulations introduced after the crisis have made banks and the repo market more resilient. In some cases, they also negatively affected liquidity and reduced market access by increasing the cost of dealer activity. One way to reduce costs in the repo market is to expand the use of central counterparties (CCPs)."
It adds, "This brief quantifies the potential direct economic benefits to market participants and increased risks to CCPs of moving bilateral repo transactions between U.S. dealers and their nondealer clients to CCPs. The brief analyzes data from the bilateral repo data collection pilot that the Office of Financial Research conducted in 2015 with the Federal Reserve, with input from the Securities and Exchange Commission. Analysis shows that using CCPs offers economic incentives to repo dealers by reducing their risk exposures. That benefit must be weighed against the cost of additional funds those dealers would have to contribute to cushion CCPs from the increased risks."
Crane Data released its March Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of Feb. 28, 2017, shows declines in Treasuries and Agencies, and increases in CP and CDs. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) decreased by $18.1 billion to $2.647 trillion last month, after increasing by $7.2 billion in Jan., $34.7 billion in Dec., and $106.5 billion in Nov. Repo remained slightly larger than Treasuries and the largest portfolio segment, as Treasuries fell and Repo was flat. Agencies, which declined slightly, remained the third largest segment. CDs also rose and were in fourth place, followed by Commercial Paper, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Visit our Content center to download the latest files, or contact us if you'd like to see a sample of our latest Portfolio Holdings Reports.)
Among all taxable money funds, Treasury securities fell $29.3 billion (-3.7%) to $755.5 billion, or 28.5% of holdings, after falling $37.8 billion in January, $59.4 billion in Dec. and rising $101.6 billion in November. Repurchase Agreements (repo) rose $3.3 billion (0.4%) to $792.1 billion, or 29.9% of holdings, after falling $43.6 billion in January, rising $56.3 billion in Dec. and falling $21.1 billion in Nov. Government Agency Debt decreased $10.7 billion (-1.6%) to $677.0 billion, or 25.6% of all holdings, after rising $35.3 billion in January, falling $7.7 billion in Dec., but increasing $20.3 billion in Nov. Repo, Treasuries and Agencies in total continued to gradually retreat from December's record levels, but they still represent a massive 84% of all taxable holdings. Govt and Treasury MMFs lost assets and Prime MMFs increased slightly last month.
CDs, CP and Other (Time Deposits) segments all increased again last month. Certificates of Deposit (CDs) were up $5.5 billion (3.2%) to $175.5 billion, or 6.6% of taxable assets, after rising $22.4 in January, declining $0.2 billion in Dec., and $1.0 billion in Nov. Commercial Paper (CP) was up $10.4 billion (7.4%) to $150.9 billion, or 5.7% of holdings (after rising $16.9 billion in January and decreasing $9.5 billion in Dec.), while Other holdings, primarily Time Deposits, rose $3.9 billion (6.5%) to $63.7 billion, or 2.4% of holdings. (Time Deposits normally rise after quarter-end as Repo falls.) VRDNs held by taxable funds decreased by $1.1 billion (-3.4%) to $32.0 billion (1.2% of assets).
Prime money fund assets tracked by Crane Data rose to $532 billion (up from $515 billion last month), or 20.1% (up from 19.3%) of taxable money fund holdings' total of $2.647 trillion. Among Prime money funds, CDs represent a third of holdings at 33.0% (the same as 33.0% a month ago), followed by Commercial Paper at 28.2% (up from 27.3%). The CP totals are comprised of: Financial Company CP, which makes up 16.8% of total holdings, Asset-Backed CP, which accounts for 5.8%, and Non-Financial Company CP, which makes up 5.7%. Prime funds also hold 1.7% in US Govt Agency Debt, 7.4% in US Treasury Debt, 6.5% in US Treasury Repo, 3% in Other Instruments, 9.8% in Non-Negotiable Time Deposits, 5.6% in Other Repo, 1.6% in US Government Agency Repo, and 4.2% in VRDNs.
Government money fund portfolios totaled $1.496 trillion (56.5% of all MMF assets), down from $1.517 trillion in January, while Treasury money fund assets totaled another $618 billion (23.3%) in February, down from $633 billion the prior month. Government money fund portfolios were made up of 44.6% US Govt Agency Debt, 16.0% US Government Agency Repo, 17.9% US Treasury debt, and 20.6% in US Treasury Repo. Treasury money funds were comprised of 72.4% US Treasury debt, 27.4% in US Treasury Repo, and 0.1% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.114 trillion, or almost 80% (79.9%) of all taxable money fund assets, down from 80.7% last month.
European-affiliated holdings decreased $3.9 billion in February to $469.5 billion among all taxable funds (and including repos); their share of holdings decreased to 17.7% from 17.8% the previous month. Eurozone-affiliated holdings increased $1.9 billion to $330.9 billion in Feb.; they now account for 12.5% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $2.0 billion to $173.6 billion (6.6% of the total). Americas related holdings decreased $16.9 billion to $2.003 trillion and now represent 75.7% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which increased $13.9 billion, or 2.8%, to $513.1 billion, or 19.4% of assets; US Government Agency Repurchase Agreements (down $7.2 billion to $249.1 billion, or 9.4% of total holdings), and Other Repurchase Agreements ($30.0 billion, or 1.1% of holdings, down $3.4 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $5.6 billion to $89.4 billion, or 3.4% of assets), Asset Backed Commercial Paper (up $0.7 billion to $30.9 billion, or 1.2%), and Non-Financial Company Commercial Paper (up $4.1 billion to $30.6 billion, or 1.2%).
The 20 largest Issuers to taxable money market funds as of Feb. 28, 2017, include: the US Treasury ($755.5 billion, or 28.5%), Federal Home Loan Bank ($505.4B, 19.1%), Federal Reserve Bank of New York ($175.6B, 6.6%), BNP Paribas ($101.3B, 3.8%), Federal Farm Credit Bank ($68.6B, 2.6%), Federal Home Loan Mortgage Co. ($64.2B, 2.4%), Credit Agricole ($59.0B, 2.2%), RBC ($53.0B, 2.0%), Wells Fargo ($52.2B, 2.0%), Societe Generale ($40.6B, 1.5%), Bank of America ($37.0B, 1.4%), Nomura ($36.8B, 1.4%), Federal National Mortgage Association ($36.6B, 1.4%), Mitsubishi UFJ Financial Group Inc. ($34.2B, 1.3%), JP Morgan ($31.2B, 1.2%), Bank of Montreal ($30.9B, 1.2%), Bank of Nova Scotia ($30.3B, 1.1%), Citi ($29.6B, 1.1%), HSBC ($27.6B, 1.0%), and Natixis ($27.1B, 1.0%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($175.6B, 22.2%), BNP Paribas ($90.5B, 11.4%), Credit Agricole ($45.7B, 5.8%), RBC ($41.9B, 5.3%), Wells Fargo ($41.1B, 5.2%), Nomura ($36.8B, 4.6%), Societe Generale ($33.8B, 4.3%), Bank of America ($33.0B, 4.2%), JP Morgan ($25.6B, 3.2%), and Citi ($23.2B, 2.9%). The 10 largest Fed Repo positions among MMFs on 2/28 include: Northern Trust Trs MMkt ($15.1B), Fidelity Cash Central Fund ($13.5B), JP Morgan US Govt ($12.6B), Vanguard Market Liquidity Fund ($7.1B), State Street Inst US Gvt ($6.8B), Northern Inst Gvt Select ($6.5B), First American Gvt Oblg ($6.3B), Morgan Stanley Inst Lq Gvt Sec ($6.3B), Goldman Sachs FS Gvt ($6.1B), and Dreyfus Govt Cash Mgmt ($6.0B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($15.2B, 4.4%), Credit Agricole ($13.3B, 3.9%), Toronto-Dominion Bank ($13.1B, 3.8%), Bank of Montreal ($11.4B, 3.3%), Canadian Imperial Bank of Commerce ($11.1B, 3.2%), Wells Fargo ($11.1B, 3.2%), RBC ($11.1B, 3.2%), Natixis ($10.9B, 3.2%), BNP Paribas ($10.9B, 3.2%), and Swedbank ($10.2B, 3.0%).
The 10 largest CD issuers include: Toronto-Dominion Bank ($12.6B, 7.2%), Bank of Montreal ($11.0B, 6.3%), Wells Fargo ($10.8B, 6.2%), Mitsubishi UFJ Financial Group Inc. ($10.6B, 6.1%), Sumitomo Mitsui Banking Co ($7.8B, 4.5%), Svenska Handelsbanken ($7.5B, 4.3%), RBC ($6.7B, 4.3%), Sumitomo Mitsui Trust Bank ($6.5B, 3.7%), KBC Group NV ($6.2B, 3.5%), and Mizuho Corporate Bank Ltd ($6.0B, 3.4%). The 10 largest CP issuers (we include affiliated ABCP programs) include: Commonwealth Bank of Australia ($7.7B, 5.8%), Credit Agricole ($6.3B, 4.7%), Societe Generale ($6.2B, 4.7%), BNP Paribas ($5.6B, 4.2%), Westpac Banking Co ($5.5B, 4.1%), Bank of Nova Scotia ($5.3B, 4.0%), National Australia Bank Ltd ($4.9B, 3.7%), JP Morgan ($4.5B, 3.4%), Swedbank AB ($4.4B, 3.3%), and General Electric ($4.3B, 3.2%).
The largest increases among Issuers include: The Federal Reserve Bank of New York (up $19.9B to $175.6B), Bank of Montreal (up $4.4B to $30.9B), Natixis (up $3.7B to $27.1B), Federal National Mortgage Association (up $3.5B to $36.6B), Canadian Imperial Bank of Commerce (up $3.1B to $16.2B), DnB NOR Bank ASA (up $2.0B to $9.8B), Swedbank AB (up $2.0B to $10.2B), Bank of America (up $1.8B to $37.0B), Toronto-Dominion Bank (up $1.8B to $23.6B), and Goldman Sachs (up $1.3B to $14.5B).
The largest decreases among Issuers of money market securities (including Repo) in February were shown by: The US Treasury (down $29.3B to $755.5B), Federal Home Loan Bank (down $11.0B to $505.4B), Credit Suisse (down $10.0B to $14.3B), JP Morgan (down $8.5B to $31.2B), Barclays PLC (down $2.9B to $26.4B), Mitsubishi UFJ Financial Group Inc (down $2.8B to $34.2B), Bank of Nova Scotia (down $2.1B to $30.3B), Federal Home Loan Mortgage Co (down $2.0B to $64.2B) and HSBC (down $2.0B to $27.6B).
The United States remained the largest segment of country-affiliations; it represents 69.6% of holdings, or $1.841 trillion. France (9.2%, $242.4B) remained in second place ahead of Canada (6.1%, $161.5B) in 3rd. Japan (4.8%, $127.0B) stayed in fourth, while the United Kingdom (2.5%, $66.1B) remained in fifth place. Germany (1.6%, $42.7B) ranked sixth, ahead of Sweden (1.5%, $40.0B), Australia (1.4%, $36.9B), The Netherlands (1.3%, $35.0B) and Switzerland (0.8%, $19.9B). (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of Feb. 28, 2017, Taxable money funds held 29.9% (up from 29.3%) of their assets in securities maturing Overnight, and another 14.8% maturing in 2-7 days (up from 14.2%). Thus, 44.7% in total matures in 1-7 days. Another 19.3% matures in 8-30 days, while 11.7% matures in 31-60 days. Note that over three-quarters, or 75.7% of securities, mature in 60 days or less (up from last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 10.0% of taxable securities, while 10.0% matures in 91-180 days, and just 4.3% matures beyond 180 days.
Bank of America Merrill Lynch published a "US Rates Watch" update entitled, "Money market client survey: MMF reform shifts to be long lasting" earlier this week. Written by Mark Cabana, the piece tells us, "It has been nearly 5 months since 2a-7 money market mutual fund reform took effect, which saw over $1tn move out of prime funds and a similar amount into government funds. To gain some perspective on the outlook for money markets, we recently conducted a survey of our corporate clients. We wanted to better understand the conditions under which clients would consider shifting funds back into prime, alternatives they were considering to enhance yield, and how international tax reform might impact money markets."
It explains, "This survey is a compliment to the surveys we conducted prior to 2a-7 reform last year. Our survey was conducted from February 15–24 and was sent to corporate accounts that are active in money markets. We received 40 responses and more detail on our respondents can be found in the appendix." (The Appendix adds that "all clients were corporations that invest in money markets (not investment managers).)
Bank of America's update explains, "The key takeaways from our survey include: Shifts as a result of money market mutual fund will likely be long lasting with the vast majority of survey respondents suggesting they will not be adjusting their prime fund allocations in the near term; The required yield to move back into prime funds was most frequently cited at 60bps, approximately 30bps higher than current yield levels. Survey respondents expect that roughly $275bn of the over $1trn that left prime would return to the asset class in the next 18-24 months; Liquidity and safety appear to be prioritized over yield enhancement; and, Repatriation is expected to result in reduced offshore cash holdings but views on the broader money market impact were more mixed."
BofA's Cabana writes, "In-line with the over $1tn shift out of prime funds since late 2015, our survey respondents also meaningfully reduced their prime MMF holdings. The vast majority our respondents reported they reallocated over 80% of their cash holdings out of prime and into government MMF as a result of 2a-7 reform. This is similar to the 85% decline of institutional prime MMF holdings across the industry. Outside of the prime to gov't shift, survey respondents reported only modest increases in bank deposits, separately managed accounts, or Treasury/agency direct holdings."
He continues, "Most of the movement out of prime funds appears to be structural, according to our survey respondents. The vast majority of survey respondents suggested that they would not be adjusting their prime fund allocations over the next year. Even if offered more attractive yields, 50% of respondents suggested they would not consider moving back into prime funds while 42% of respondents might consider moving back for the "right yield" in the next year."
Merrill's survey update says, "When asked about the "right yield" to move back into prime funds, nearly 50% of respondents suggested that the 7-day yield differential between prime and government MMF would need to be greater than 60 bps. This is a notable increase from our money fund survey published this past June in which 55% of respondents suggested they would require a yield pickup of between 20-40 bps. It is also double the current 7-day net yield differential of roughly 30bps."
The piece states, "Respondents also indicated that some of the required spread pickup may be a function of Federal Reserve rate increases. Client weighted average responses suggested their required yield would increase 10bps for every 25bp Fed rate hike. Such a widening yield differential would be inconsistent with recent history where the prime to government spread widened only modestly as the Fed raised rates 425 bps during the 2004-2006 hiking cycle. It also suggests a very high threshold amongst clients for inflows back into prime funds."
It continues, "Client expectations for the total amount that would return to prime funds were more optimistic than for their own portfolios. A weighted average of survey respondents suggested that roughly $175bn could move into prime funds in the next 6M and that a total of roughly $275bn could move back over the next 18-24M. However, there were a relatively wide range of responses to this question and the modal response suggested that less than $100bn would move back into prime over both time horizons."
Cabana also tells us, "Survey respondents also indicated that they were not aggressively looking to enhance yield on their cash holdings. When asked about alternatives they were considering for increasing yield on their cash holdings, most suggested that they were looking into government funds, bank deposits, or direct investments in CP & CDs. Respondents indicated that they were generally not considering or only moderately considering other higher yielding alternatives such as enhanced cash funds, short duration funds, or private placement funds. This suggests that clients are likely willing to prioritize liquidity and safety on their cash holdings in relation to higher yields in a post 2a-7 reform environment."
Finally, he adds, "Clients were also asked about the impact of any international tax reform changes that could result in repatriation of offshore dollars. While there are still numerous outstanding questions associated with tax reform, respondents generally expect that any opportunity to bring cash back onshore would result in offshore money fund balances being drawn down. Respondents had more mixed expectations of the broader repatriation impact on money markets; a similar number of responses suggested that repatriation flows would increase funding strains via the cross currency basis market as those that expected no material impact to money markets."
Crane Data's latest Money Fund Market Share rankings show mixed results among U.S. money fund complexes in February with overall assets relatively flat. Though we show total assets increasing $45.6 billion, or 1.7%, last month, we added $45.0 billion in new funds to our collection. Overall assets rose by $115.3 billion, or 4.4%, over the past 3 months, and they've increased by $63.1 billion, or 2.3% over the past 12 months through Feb. 28. (Note: December's asset totals were inflated by the addition of $110 billion in "internal" money funds to our collections.) The biggest gainers in February were Fidelity, whose MMFs rose by $11.4 billion, or 2.3%, JP Morgan, whose MMFs rose by $11.2 billion, or 4.7%, and BlackRock, whose MMFs rose by $5.7 billion, or 2.4%. (Both Fidelity and JPM were inflated by the addition of new funds, however. See yesterday's "News" for the additions.)
Dreyfus, Deutsche, UBS, SSGA and Vanguard also saw assets increase in February, rising by $2.8B, $2.1B, $1.7B, $1.2B, and $1.1B, respectively. The biggest declines were seen by Goldman Sachs, Wells Fargo, Federated, Invesco and Oppenheimer. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product, and the combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.) We review these market share totals below, and we also look at money fund yields the past month, which moved higher again for Taxable funds.
Over the past year through Feb. 28, 2017, Vanguard (up $78.9B) and Fidelity (up $63.7B) were the largest gainers, but BlackRock would have been the largest gainer (up $26.9B, or 12.2%) had we adjusted for recently added Vanguard ($52.0B) and Fidelity ($42.0B) internal fund assets. These were followed by JP Morgan (up $13.3B, or 5.6%), First American (up $6.5B, or 16.5%), PNC (up $6.0B, or 111.3%) and TIAA-CREF (up $5.2B). Vanguard, Fidelity, Dreyfus, TIAA-CREF, and UBS had the largest money fund asset increases over the past 3 months, rising by $55.7B, $47.9B, $8.2B, $5.2B and $4.9B, respectively.
Other asset gainers for the past year include: Alliance Bernstein (up $4.4B, or 245.2%), UBS (up $4.1B, or 10.7%), Northern (up $4.1B, or 4.5%), American Beacon (up $922M, or 199.1%), Voya (ING) (up $907M, 485.0%), and USAA (up $750M, 8.3%). The biggest decliners over 12 months include: Federated (down $28.8B, or -13.4%), Wells Fargo (down $18.5B, or -16.3%), SSGA (down $12.5B, or -13.4%), Goldman Sachs (down $9.3B, or -4.9%), Schwab (down $8.4B, or -5.0%), and Western (down $7.8B, or -18.0%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $510.9 billion, or 18.5% of all assets (up $11.4 billion in Feb., up $47.9 billion over 3 mos., and up $63.7B over 12 months). Vanguard ranked second with $260.2 billion, or 9.4% of assets (up $1.1B, up $55.7B, and up $78.9B for the past 1-month, 3-mos. and 12-mos., respectively). JP Morgan is third with $252.0 billion, or 9.1% market share (up $11.2B, up $1.2B, and up $13.3B for the past 1-month, 3-mos. and 12-mos., respectively). BlackRock is in fourth with $248.0 billion, or 9.0% of assets (up $5.7B, down $323M, and up $26.9B).
Federated moved up to 5th with $185.8 billion, or 6.7% of assets (down $1.5B, down $8.3B, and down $28.8B), while Goldman Sachs fell to sixth place with $181.4 billion, or 6.6% (down $10.2B, down $11.8B, and down $9.3B). Schwab ($159.3B, or 5.8%) was in seventh place, followed by Dreyfus in eighth place ($152.4B, or 5.5%), Morgan Stanley in ninth place ($126.3B, or 4.6%), and Northern in tenth place ($96.3B, or 3.5%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Wells Fargo ($95.1B, or 3.4%), SSGA ($81.2B, or 2.9%), Invesco ($54.3B, or 2.0%), First American ($45.8B, or 1.7%), UBS ($42.8B, or 1.6%), Western ($35.4B, or 1.3%), Deutsche ($22.7B, or 0.8%), DFA ($22.5B, or 0.8%), Franklin ($18.4B, or 0.7%), and American Funds ($17.0B, or 0.6%). The 11th through 20th ranked managers are the same as last month, except UBS moved ahead of Western, and DFA was a new addition to the list (and to our collections). Crane Data currently tracks 66 U.S. MMF managers, up 2 from last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for JPMorgan moving ahead of BlackRock and Vanguard, BlackRock and Goldman Sachs moving ahead of Vanguard, Dreyfus/BNY Mellon moving ahead of Schwab to 7th, and Northern and SSGA moving ahead of Wells Fargo into 10th and 11th place.
Looking at our Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore"), the largest money market fund families include: Fidelity ($519.6 billion), JP Morgan ($406.3B), BlackRock ($364.7B), Goldman Sachs ($275.3B), and Vanguard ($260.2B). Federated ($194.1B) was sixth and Dreyfus/BNY Mellon ($177.2B) was seventh, followed by Schwab ($159.3B), Morgan Stanley ($157.4B), and Northern ($110.2B), which round out the top 10. These totals include "offshore" US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
The February issue of our Money Fund Intelligence and MFI XLS, with data as of 2/28/17, shows that yields inched higher or were flat in February across our Taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 737), was unchanged at 0.29% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 1 bp to 0.29%. The MFA's Gross 7-Day Yield was unchanged at 0.69%, while the Gross 30-Day Yield was up 1 bp to 0.69%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.48% (up 1 bp) and an average 30-Day Yield of 0.48% (up 2 bps). The Crane 100 shows a Gross 7-Day Yield of 0.75% (up 1 bp), and a Gross 30-Day Yield of 0.75% (up 2 bps). For the 12 month return through 2/28/17, our Crane MF Average returned 0.16% and our Crane 100 returned 0.30%. The total number of funds, including taxable and tax-exempt, increased to 982, up 9 from last month. There are currently 737 taxable and 245 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 0.57% (up 1 bp) as of Feb. 28, while the Crane Govt Inst Index was 0.32% (up 1 bp) and the Treasury Inst Index was 0.28% (up 1 bp). Thus, the spread between Prime funds and Treasury funds is 29 basis points, the same level as last month. The Crane Prime Retail Index yielded 0.39% (up 1 bp), while the Govt Retail Index yielded 0.07% (unchanged) and the Treasury Retail Index was 0.09% (up 1 bp). The Crane Tax Exempt MF Index yield declined to 0.21% (down 1 bp).
The Gross 7-Day Yields for these indexes in February were: Prime Inst 0.94% (up 1 bp), Govt Inst 0.60% (up 1 bp), Treasury Inst 0.56% (up 1 bp), Prime Retail 0.92% (unchanged), Govt Retail 0.59% (down 1 bp), and Treasury Retail 0.55% (unchanged). The Crane Tax Exempt Index decreased 2 basis points to 0.69%. The Crane 100 MF Index returned on average 0.04% for 1-month, 0.11% for 3-month, 0.08% for YTD, 0.30% for 1-year, 0.13% for 3-years (annualized), 0.09% for 5-years, and 0.73% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The March issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Tuesday morning, features the articles: "Green Shoots: MMFs' Future Brightens on Fed, Prime Flows," which reviews the benefits of rising rates and a return to Prime on MMFs; "New King of Cash: Interview with Fidelity's Tim Huyck," which "profiles" the Chief Investor Officer for Money Markets at Fidelity Investments; and, "In Memoriam: Money Fund Guru Bill Donoghue," which reprints Crane Data's article on Bill Donoghue. We have also updated our Money Fund Wisdom database query system with Feb. 28, 2017, performance statistics, and sent out our MFI XLS spreadsheet Tuesday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our March Money Fund Portfolio Holdings are scheduled to ship Thursday, March 9, and our March Bond Fund Intelligence is scheduled to go out Tuesday, March 14.
MFI's lead "Green Shoots: MMFs' Future Brightens" article says, "After seven years of zero yields and another two of near zero yields, money fund investors finally may see rates crawl back above 1.0% in 2017. The Federal Reserve appears poised to raise rates next week, in June and again later this year. Investors have already been inching back into Prime funds, and another hike or two may well make spreads too attractive to ignore. We examine the latest on the Fed, flows and fund news below."
It adds, "Regarding the sudden uptick in rate hikes, Federal Reserve Chair Yellen explained last week, "With the job market strengthening and inflation rising toward our target, the median assessment of FOMC participants as of last December was that a cumulative 3/4 percentage point increase in the target range for the federal funds rate would likely be appropriate over the course of this year."
Our Fidelity profile reads, "This month, Money Fund Intelligence interviews Tim Huyck, Chief Investment Officer for Money Markets at Fidelity Investments. Fidelity is by far the largest manager of money funds with over $500 billion, almost double the next largest competitor. The company's history goes back to the earliest days of money funds (recently retired Chairman Edward "Ned" Johnson III played a key role in popularizing money funds), and Fidelity remains the most important player in the space. Our Q&A follows."
MFI says, "Tell us a little about your history," and Huyck answers, "Fidelity Daily Income Trust (FDIT) was the first money fund that we launched at Fidelity [in 1974], and it was the first money fund with check writing privileges.... I joined Fidelity in September 1990, just before the move of the money market desk from Boston to Dallas. We were in Dallas for 7 years, and then in November of '97 we moved from Dallas to Merrimack. We're celebrating our 20-year anniversary here in Merrimack (NH) this year."
He adds, "I'm coming up on 27 years at Fidelity, and all but three of those years have been spent in money markets. I've traded; I've managed the trading desk; I basically had every trading role on the taxable money market desk. I managed most of the taxable money market funds that we had at some point or another. In 2014, I took over as CIO for the money market group, and I report into Nancy Prior."
Our "In Memoriam on Bill Donoghue" explains, "Crane Data was saddened to learn recently that the original money fund 'guru," Bill Donoghue, passed away. Donoghue's Obituary explains, "William E. Donoghue, 75, of Seattle, Washington, died January 16, 2017 in Healdsburg, California. Donoghue was a respected author and investment expert best known for the growth of money market mutual funds, of which he raised awareness through newsletters, investment conferences, books, and television appearances." We excerpt from the obituary and reflect on our Peter Crane's history with Donoghue."
The obituary continues, "While in graduate school, Donoghue met a professor who encouraged him to focus on cash management. He quickly became a leading expert on the subject, chairing financial management seminars and serving as editor of Donoghue's MoneyLetter. The periodical came out during a time of unusually high interest rates. In the 1980s, Donoghue was the leading analyst and monitor of the budding money market mutual fund industry. Along with MoneyLetter, he founded "Donoghue's Money Fund Average," a rating system for these interest-sensitive investment vehicles."
In a sidebar, we discuss, "JPMorgan on "Alt-Cash," saying, "J.P. Morgan Securities' "Short Duration Strategy Weekly" featured a brief last month entitled, "Ultrashort and short-term bond fund update." They explain, "Ultrashort and short-term bond funds are one subsector of the non 2a-7 space that have received a relatively increased amount of attention post-MMF reform. These "alt-cash" vehicles are comprised of ETFs and open-ended mutual funds that invest primarily in high grade fixed income securities maturing anywhere between 6 moths to 3.5 years -- well beyond what most consider to be the traditional money market arena."
Our March MFI XLS, with Feb. 28, 2017, data, shows total assets increased $45.6 billion in February (this includes the addition of $45.0 billion in new funds) to $2.761 trillion after decreasing $43.0 billion in January, and increasing $107.8 billion in December (this includes the addition of $110.3 billion in new funds). Our broad Crane Money Fund Average 7-Day Yield was up one bps to 0.29% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was unchanged at 0.48% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA rose 0.01% to 0.69% and the Crane 100 rose 2 bps to 0.75%. Charged Expenses averaged 0.40% and 0.27% for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 36 days (down 1 day from last month) and for the Crane 100 was also 36 days (down 1 day from last month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The $45.0 billion in new funds added this month to Crane Data's Money Fund Intelligence XLS collection include: American Funds US Govt MMF R6 (RAFXX, $588M), DFA Short Term Investment Fund (DFA01, $22.6B), Fidelity Series Govt Money Market F (FFGXX, $3.7B), Fidelity Series Govt Money Market Fund (FGNXX, $3.3B), Great-West Govt MM Initial (MXMXX, $1.4B), JPMorgan Prime MM IM (JIMXX, $1.9B), JPMorgan US Govt MM IM (MGMXX, $598M), JPMorgan US Trs Plus MM IM (MJPXX, $7.3B), SEI Daily Inc Trust Treasury II A (SCPXX, $545M), UBS Select Govt Investor (SGEXX, $57M), Voya Govt Liquid Asset S (ISPXX, $601M), Voya Govt Liquid Asset S2 (ITLXX, $334M), Western Asset Inst Govt MM L (LWPXX, $516M), and Fidelity Muni Cash Central Fund (FID04, $1.7B).
On Friday, Federal Reserve Chair Janet Yellen spoke on "From Adding Accommodation to Scaling It Back," indicated that the Fed was likely to hike short-term interest rates at its meeting next week (March 14-15). Money fund yields, which were relatively flat in February after rising in December and January, should again move higher immediately following the Fed move. We review Yellen's speech and The Wall Street Journal article, "Yellen Signals Rate Increase Likely at March Fed Meeting," on the pending hike, and we also briefly discuss the likely impact on money market fund yields, below.
Yellen explains in her speech, "The slower-than-anticipated increase in our federal funds rate target in 2015 and 2016 reflected more than just the inflation, job market, and foreign developments I mentioned. During that period, the FOMC and most private forecasters generally lowered their assessments of the longer-run neutral level of the real federal funds rate.... In response to this growing evidence, the median assessment by FOMC participants of the longer-run level of the real federal funds rate fell from 1-3/4 percent in June 2014 to 1-1/2 percent in December 2015 and then to 1 percent in December 2016."
She continues, "The U.S. economy has exhibited remarkable resilience in the face of adverse shocks in recent years, and economic developments since mid-2016 have reinforced the Committee's confidence that the economy is on track to achieve our statutory goals.... On the whole, the prospects for further moderate economic growth look encouraging, particularly as risks emanating from abroad appear to have receded somewhat. The Committee currently assesses that the risks to the outlook are roughly balanced. Moreover, after remaining disappointingly low through mid-2016, inflation moved up during the second half of 2016."
The Fed Chair says, "With the job market strengthening and inflation rising toward our target, the median assessment of FOMC participants as of last December was that a cumulative 3/4 percentage point increase in the target range for the federal funds rate would likely be appropriate over the course of this year. In light of current economic conditions, such an increase would be consistent with the Committee's expectation that it will raise the target range for the federal funds rate at a gradual pace and would bring the real federal funds rate close to some estimates of its current neutral level. However, partly because my colleagues and I expect the neutral real federal funds rate to rise somewhat over the longer run, we projected additional gradual rate hikes in 2018 and 2019."
She also comments, "Our individual projections for the appropriate path for the federal funds rate reflect economic forecasts that generally envision that economic activity will expand at a moderate pace in coming years, labor market conditions will strengthen somewhat further, and inflation will be at or near 2 percent over the medium term. In short, we currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect. Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate."
Yellen adds, "To conclude, we at the Federal Reserve must remain squarely focused on our congressionally mandated goals. The economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2 percent objective. This outcome suggests that our goal-focused, outlook-dependent approach to scaling back accommodation over the past couple of years has served the U.S. economy well."
Finally, she tells the audience, "[W]e realize that waiting too long to scale back some of our support could potentially require us to raise rates rapidly sometime down the road, which in turn could risk disrupting financial markets and pushing the economy into recession. Having said that, I currently see no evidence that the Federal Reserve has fallen behind the curve, and I therefore continue to have confidence in our judgment that a gradual removal of accommodation is likely to be appropriate. However, as I have noted, unless unanticipated developments adversely affect the economic outlook, the process of scaling back accommodation likely will not be as slow as it was during the past couple of years."
The WSJ article says, "Federal Reserve Chairwoman Janet Yellen signaled the central bank is on course to pick up the pace of interest-rate increases, with the next rise coming as soon as March and more to come later this year.... An improving economy, firming inflation, and the possibility of more spending and less taxing by the Trump administration appear to have made Fed officials comfortable with nudging rates higher at their next policy meeting March 14-15."
The article explains, "Ms. Yellen's remarks cap a week of similar statements from Fed decision makers suggesting they were leaning toward lifting rates at the coming meeting. On Tuesday, the leaders of the San Francisco and New York Fed banks both spoke of a need to raise rates relatively soon, a message echoed by Fed governors Lael Brainard and Jerome Powell later in the week. Fed Vice Chairman Stanley Fischer chimed in Friday in New York."
It adds, "The Fed has for some time signaled the March meeting was a possible time to boost borrowing costs. Ms. Yellen suggested as much when she told Congress in February that an increase might come "at our upcoming meetings." However, markets only appeared to have taken the message seriously in recent days. On Monday, federal-fund futures tracked by CME Group suggested investors saw a roughly 35% chance of an interest-rate increase this month. That surged to 81.9% by Friday afternoon."
Our Crane 100 Money Fund Index, the average of the 100 largest taxable money funds, has moved up from 0.05% prior to the first Fed move in December 2015, to 0.30% just prior to the second Fed move. It currently stands at 0.48%, and should move up towards 0.73% over the next month or so. Prime Institutional funds, which yielded 0.07% on average before the first Fed hike, and 0.33% before the second hike, now yield 0.56%. (Spreads over Treasury Inst MMFs have risen from 6 basis points, to 18 bps, to 28 bps during this time.)
The Investment Company Institute released its latest weekly "Money Market Mutual Fund Assets" report, which shows Prime assets increasing for the fourth week in a row, and the 9th week out of the past 10. Prime MMFs have risen by $19.2 billion, or 5.1% since 12/21/16. ICI's statistics show Prime money fund assets rising to their highest level since October 12, 2016, just prior to Money Fund Reforms going into effect. Government money market fund assets have fallen in seven of the past 10 weeks. We review the latest asset report, and we also mention some new "People" news in the money fund space below.
ICI's latest release says, "Total money market fund assets decreased by $1.97 billion to $2.68 trillion for the week ended Wednesday, March 1, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $1.65 billion and prime funds increased by $360 million. Tax-exempt money market funds decreased by $680 million." Total Government MMF assets, which include Treasury funds too and which represent 80.4% of all money funds, stand at $2.154 trillion, while Total Prime MMFs, which account for 14.7% of all MMFs, stand at $394.0 billion. Tax Exempt MMFs total $130.3 billion, or 4.9%.
It explains, "Assets of retail money market funds decreased by $1.31 billion to $976.90 billion. Among retail funds, government money market fund assets decreased by $1.17 billion to $599.43 billion, prime money market fund assets increased by $110 million to $251.81 billion, and tax-exempt fund assets decreased by $250 million to $125.66 billion." Retail assets account for over a third of total assets, or 36.5%, and Government Retail assets make up 61.4% of all Retail MMFs.
The release continues, "Assets of institutional money market funds decreased by $650 million to $1.70 trillion. Among institutional funds, government money market fund assets decreased by $470 million to $1.55 trillion, prime money market fund assets increased by $260 million to $142.28 billion, and tax-exempt fund assets decreased by $440 million to $4.69 billion." Institutional assets account for 63.5% of all MMF assets, with Government Inst assets making up 91.4% of all Institutional MMFs.
In other news, we learned of two recent press releases announcing "People" news in the cash investment sector. The first, entitled, "Public Trust Advisors Welcomes Joel Friedman to its Investment Advisory Team," tells us, "Public Trust Advisors, LLC (Public Trust) is pleased to announce that Joel Friedman has joined Public Trust as a senior member of our Investment Advisory Team. With more than 25 years of investment management experience, Joel brings a strong leadership and analytical background coupled with longstanding relationship management skills proven throughout the institutional marketplace."
Chief Executive Officer Thomas Jordan comments, "These skills are a perfect fit to assist Public Trust in ensuring exceptional client service as we continue to expand across the country. Joel's skills are a compliment to strong client relationships that specifically tailor investment solutions to our existing market." The release adds, "Before joining Public Trust, Joel was most recently a Senior Director at Standard & Poor's in New York where he led their global fund ratings activities representing more than $2 trillion of rated mutual funds, ETF’s, and separate accounts."
The release adds, "Public Trust Advisors investment services for the public sector include the management of local governments investment pools (LGIP) and separately managed, individual investment accounts (SMA).... Public Trust Advisors brand LGIP investment management services are used by eight local government investment pools and nearly 3,000 participating entities nationally. Public Trust Advisors LGIPs include the Colorado Local Government Liquid Asset Trust (COLOTRUST PRIME and COLOTRUST PLUS+), Florida Cooperative Liquid Assets Securities System (FLCLASS), New York Cooperative Liquid Assets Securities System (NYCLASS), Texas Cooperative Liquid Assets Securities System Trust (Texas CLASS and Texas CLASS Government), Michigan Cooperative Liquid Assets Security System (Michigan CLASS), TrustINdiana, Louisiana Asset Management Pool (LAMP), and VACo/VML Virginia Investment Pool (VIP)."
Another release, entitled, "StoneCastle Expands Insured Sweep Business with Key New Hires," explains, "StoneCastle Cash Management, LLC, a market leading provider of insured deposit technology and services, announced the appointment of two executives to support the firm's expansion strategies. Frank Bonanno, an industry expert in the insured cash sweep business for broker-dealers and other third party intermediaries, has been appointed Managing Director, Head of Marketing. In addition, Kyle McAndrew, an experienced sales professional, has been tapped as Vice President to lead business development for the firm's insured sweep business."
It continues, "Both executives recently departed Reich & Tang where Bonanno was Director and Head of Marketing since 2011 before joining StoneCastle's team. He has over 20 years' experience in the marketing of financial services, with a focus on the cash management sector. Prior to that, Bonanno worked in senior leadership positions at Double Rock Corp., The Reserve, and The Dreyfus Corporation. McAndrew brings a decade of experience in business development and client service to broker-dealers, registered investment advisors, and other financial intermediary platforms. He spent the early part of his career as an advisory consultant at LPL Financial."
StoneCastle CEO Stephen Rotella comments, "We are delivering on our commitment to be a differentiated and disruptive force in the insured cash sweep business. The combination of our leading technology, deep expertise, and the strength of our team creates a compelling value proposition for our clients and the industry at large. Adding these two outstanding industry veterans is an exclamation point to that commitment.... Frank and Kyle bring great market insights and a zealous focus on the needs of our clients. They will further elevate StoneCastle's insured sweep expertise and add momentum to our firm foothold in the brokerage sweep marketplace."
Finally, Bonanno adds, "I am excited with this opportunity, which comes at a pivotal time in the evolution of the StoneCastle organization. The firm's expertise in cash management, combined with its extensive bank network, strong technology platform, and organizational strength, puts the firm in a uniquely strong position to differentiate itself within an otherwise staid and commoditized cash business. I look forward to working with such a talented team to fully leverage the firm's distinct advantages and expand its business."
Last week, we wrote about recent webinar from SSGA and a 10-K filing from Federated. State Street Global Advisors followed up the webinar with the publication of a white paper, entitled, "Global Cash: State of the Markets," which discusses the return to Prime, European reforms and the Fed in more detail. Meanwhile, Federated CEO Chris Donahue spoke yesterday at a Citi conference and weighed in on these subjects, as well as competitive pressures in the space. We review both the paper and the speech below.
SSGA writes in a 20-page piece that "2017 marks a fresh beginning for the world of cash investing." They summarize, "New investment parameters are impacting cash investors worldwide. The long-awaited money market fund reform is past in the US and is now rapidly approaching in the European Union. Meanwhile, global interest rates are beginning to diverge, and we expect this trend to intensify in 2017."
The paper explains, "For investors on both sides of the Atlantic, we see the potential for additional returns among US dollar-denominated prime and short-term bond funds, within a risk profile acceptable for most cash investors. In the US, in response to money market fund (MMF) reform implementation, the yield spread of prime vs. government funds had moved incrementally higher, to about 30 basis points (bps). The spread has continued to rise, and we expect it to remain in the 30–35 bps range (see Figure 1) in early 2017 driven mainly by technical factors; credit conditions among MMF counterparties are widely viewed as strong and stable. Capitalizing on this, we expect at least $200 billion to move into US prime funds."
SSGA tells us, "Looking back at the October 2016 US reform deadline, investors exercised extreme caution as reflected in an unprecedented $1.1 trillion move from prime funds largely to government funds. Yet reform arrived without a hitch. Liquidity and principal were preserved. Government funds seamlessly absorbed the influx with some assist from the Fed's Reverse Repurchase Agreement Operations (known as RRP). The changes were well telegraphed, and everyone involved -- cash investors, portfolio managers and credit issuers -- had adequate time to make adjustments and avoid disruptions. As expected, the share prices of the newly floated prime funds avoided significant volatility. Money funds maintained more than ample liquidity, obviating the need to contemplate fees or gates despite an asset transfer representing three-quarters of prime fund assets."
They continue, "While we understand investors' need to exercise an abundance of caution, there's irony in this unprecedented asset transfer. The prime funds that investors fled from are arguably more transparent and more liquid than at any time since the SEC adopted regulation 2a-7 in 1983. Indeed, reform was conceived to further protect both cash investors and the wider financial system. We see no reason to believe this goal has not been achieved." The report discusses
State Street's update concludes, "As always, there are pockets of risk and uncertainty across the global economy, which we will be monitoring closely as 2017 progresses. Yet based on the data currently available to us, SSGA is optimistic that 2017 will be stable for cash investors, characterized by the slow rise in interest rates and strong credit fundamentals for MMF counterparties. With a new regulatory friendly administration in Washington, a successful phase-in of US money fund reform, and visibility on the upcoming EU reforms, we believe cash investing is entering a new era of increased safety and liquidity. All this presents an opportunity for investors to diversify beyond government MMFs, by considering whether higher yielding strategies such as prime funds and short-term bond funds are appropriate for their needs. SSGA remains available to review your cash needs and to help analyze which options are most appropriate for you."
In other news, Federated Investors' President and CEO J. Christopher Donahue spoke yesterday at the "Citi 2017 Asset Management, Broker Dealer & Market Structure Conference." The Q&A included several inaudible questions about money market funds, though Donahue's answers were clear. He was asked about fee pressures, assets, and Federated's market share, and responded, "Since the mid-'70s when we came out with these money funds, the fee situation has never been off the table as a competitive issue <b:>`_. Remember our first money fund came out at 100 basis points. And before long we had a family of funds that were 55 basis points and not before long there were 20 basis points, then 18. Then there was another family of funds that jumped in at 105. How did that happen?"
Donahue added, "There's a great history of movement.... The resiliency behind this, which inspires us to be enthusiastic about this business, is that despite the abuse, the changes that money funds have gone through the last several years, including several rounds of regulation, there is still $2.7 trillion in the business.... Our way of dealing with it is to come up with new products. So you've seen a collective fund that is designed for retirement accounts that actually qualifies and isn't diminished by the SEC regulations. We have a 45 or so basis point advantage over a comparable prime fund that has a 4 digit NAV, and we're seeing growth there.... And then [we have] a private fund which restores the same for other clients."
Regarding the adoption of new alternatives and potential return to Prime, he tells us, "What the clients are doing basically is looking to see what happens. Spreads are at a level which I think is attractive enough to move the money. The clients are looking at it and saying, 'Okay, how much change in the NAV is really gonna happen?' and they don't just do that for a day, a week, or a month. They're looking at it to see when they can make the move."
Donahue commented, "The next thing they have to do is make sure that their systems are able to accommodate the 4 digits and they have to get over the hump of the potential fees and gates in order to get back into Prime. Where that will occur, I don't know exactly. But we think it is going to come. And the reason is that [is a] 40-50 basis point spread.... Back in the old days, the spreads were 15 basis points between Prime and Govt.... One of the other things that ... is going on [is] an effort primarily supported by a coalition of municipal issuers [that could] get [the $1.00 NAV] restored. In this era of regulations, perhaps that has a good chance of happening."
When asked about competitive dynamics, he answered, "I've never felt [it's been] benign.... [Change is] just a constant thing. Don't forget ... there were 200 people offering funds before 2007. Now if you look at the list, there are 50 or 60, and only 20 of them matter. Only 10 are competitors with institutional clients. You have people who want to divide up how they view their cash in any event."
On rising rates, Donahue said, "Yes, it makes the money fund a more attractive place because you actually get paid to keep your cash there and ... the banks aren't bidding up for the deposits. So ... that is less of a competitive pressure. Therefore, we see growth in this business coming. When exactly and how exactly I don't know. Those competitive pressures you talk about are going to be there, and we're looking at them all the time. I can't give you a chapter and verse answers of what everybody will do. But I am confident in our position as a long term player and defender of clients."
Finally, he told the Citi event, "There are price pressures here.... When it all moved to Govies that increased pricing pressure. [I]t caused some people to go into separate accounts, which of course is a way to negotiate the fee lower. But in effect a separate account is simply a redemption timed in advance, because you already own the whole portfolio. So you see those kinds of dynamics.... So we continue to do it with enthusiasm. We think they'll be plenty of basis points [but] I can't say [what the] number is.... So you got to continue to work it, and that's what we're doing."
The preliminary agenda is available and registrations are now being taken for Crane's Money Fund Symposium, which will take place June 21-23, 2017 at The Hyatt Regency Atlanta, in Atlanta, Ga. Money Fund Symposium is the largest gathering of money market fund managers and cash investors in the world. Last summer's event in Philadelphia attracted a record 575 attendees, and we expect yet another robust turnout for our 9th annual event in Atlanta this June. Symposium participants include money fund managers, marketers and servicers, cash investors, money market securities dealers, issuers, and regulators. Visit www.moneyfundsymposium.com) for more details. Registration for attendees is $750, and discounted hotel reservations are also now available. We review the agenda and conference details below. (Click here to see the full brochure.)
Money Fund Symposium's agenda kicks off with the keynote, "The Elevation of Money Market Funds," featuring Martin Flanagan, President & CEO of Atlanta-based Invesco. The rest of the Day One agenda includes: "Private Money Funds, SMAs and ETFs," with Deborah Cunningham of Federated Investors, Rich Mejzak of BlackRock, and Andrew Wittkop of PIMCO; "Corporate Investment & Issuance Issues," with Treasury Strategies' Tony Carfang, and AFP's Jeff Glenzer; and, "Major Money Fund Issues 2017," featuring John Donohue of J.P. Morgan A.M., Tracy Hopkins of Dreyfus/BNY Mellon CIS, and Pat O'Callaghan of Goldman Sachs A.M.. (The opening evening's reception will be sponsored by Bank of America Merrill Lynch.)
Day 2 of Money Fund Symposium 2017 begins with "The State of the Money Fund Industry, with Peter Crane of Crane Data, Rick Holland of Charles Schwab, and Alex Roever of J.P. Morgan Securities. The rest of Day Two features: "Senior Portfolio Manager Perspectives," including Kevin Gaffney of Fidelity Investments, Jeff Plotnik of First American Funds, and Rob Sabatino of UBS Asset Management; "Government and Treasury Money Fund Issues," with Mike Bird of Wells Fargo Funds and Marques Mercier of Invesco; "Muni & Tax Exempt Money Fund Issues" with Fidelity's John Vetter.
The Afternoon of Day 2 (after a Dreyfus-sponsored lunch) features: "Dealer & Issuer Panel: Looking at Supply," moderated by Laurie Brignac of Invesco, with Stewart Cutler of Barclays, John Kodweis of J.P. Morgan Securities, and Jean-Luc Sinniger of Citi Global Markets; "Ratings Agency Roundtable: Criteria, Risks, NAVs," with Robert Callagy of Moody's Investors Service, Greg Favilevich of Fitch Ratings, and Michael Masih of S&P Ratings; "MMFs in Ireland, France & China," with Reyer Kooy of IMMFA, Alastair Sewell of Fitch Ratings, and Jonathan Curry of HSBC Global AM; and, "Brokerage Sweep Options & Issues" with Ted Hamilton of Promontory Interfinancial Network and Sunil Kothapalli of the Wells Fargo Advisors. (The Day 2 reception is sponsored by Barclays.)
The third day of Symposium features: "Strategists Speak '17: Rising Rates & Fed RRP" with Joseph Abate of Barclays, Mark Cabana of Bank of America Merrill Lynch, and Garrett Sloan of Wells Fargo Securities; "Treasury & Agency Supply Outlook," with John Dolan of the U.S. Dept. of Treasury, Dave Messerly of the FHLBanks Office of Finance, and Dan Davis of CastleOak Securities; and, the "Pros & Cons of Ultra-Short Bond Funds" with Michael Morin of Fidelity and Morten Olsen of Northern Trust AM. Finally, the last session is entitled, "Money Fund Trading, Technology & Data," with Peter Crane presenting on the latest money fund information tools, and featuring Sabrina Hartzog of Citi on the portal marketplace, and James Morris of Investortools on money fund trading and compliance software.
We hope you'll join us in Atlanta this June! We'd like to encourage attendees, speakers and sponsors to register and make hotel reservations early. (Note that the conference attendee list will only be given out to those staying at the conference hotel, and that we still have room for 2 more exhibitors.)
In other conference news, we're making final preparations for the inaugural Crane's Bond Fund Symposium, which will take place March 23-24 at the Boston Hyatt Regency. (Note: Today is the last day for discounted hotel reservations.) Bond Fund Symposium will bring together over 100 ultra-short bond fund and "enhanced cash" professionals next month in Boston. We hope to see you there!
Also, we'll be hosting Crane's 5th annual "offshore" money fund event, European Money Fund Symposium, in Paris, Sept. 25-26, 2017. This website (www.euromfs.com) will be live soon. (Contact us to inquire about sponsoring or speaking.) Finally, our next Money Fund University "basic training" event is tentatively scheduled for Jan. 18-19, 2018, in Providence, R.I. Watch www.cranedata.com in coming months for more details on these events, or visit the bottom of our "Content" page for past and future conference materials.
In other news, Invesco Fixed Income published a new "Global Fixed Income Strategy," which contains a brief entitled, "US government money market securities may offer greater value than bank deposits." Written by Analyst Lucas Simmons, it says, "With two fed rate hikes since 2015 and expectations for more in 2017, Invesco Global Liquidity believes investors may be better rewarded by US government money market securities than by US bank deposits. Since the Fed begin raising the target federal funds rate, bank deposit rates have not increased as quickly. Indeed many banks have indicated that they do not intend to increase deposit rates significantly in the near term. As a result, we believe that investors interested in benefiting from rising short-term interest rates may be better served by investing in US government money market securities rather than US bank deposits."
The brief continues, "US banks do not need to increase deposit rates aggressively in this interest-rate cycle. Since the global financial crisis, US banks have enjoyed a surge in deposits due to new regulations designed to bolster their liquidity positions. Consumer preferences for federally insured bank deposits (Federal Deposit Insurance Corporation insurance) have also boosted demand. As a result, a common measure of bank liquidity, the deposit-to-loan ratio, has risen sharply."
It adds, "Consequently, banks could be less aggressive in competing for a deposit than they have in past hiking cycles. Indeed, Invesco Global Liquidity expects banks to keep deposit rates low in an effort to increase net interest margins and boost profitability. Therefore, as short-term interest rates rise, we expect bank deposit rates to lag US government money market rates."
Finally, Invesco writes, "We believe institutional investors may be better served by government money market securities than bank deposits. US government money market securities, such as US Treasury bills, may offer the potential to capture higher interest rates as they adjust with Fed Policy. As seen in figure 2, US 3-month Treasury bill yields have already surpassed bank deposit rates."
